UC-NRLF 


GIFT  OF 


What  Every  Investor 
Should  Know 


An  inquiry  into  the  economic 
and  political  tendencies  of 
the  times  and  their  ef- 
fect on   hivesf- 
ment  securities 


By 

Walker   M.  Van  Riper 

Second  Edition 


Published  by 

American     Trust     Company 

,  Saint  Louis 


FOREWORD 

IT  is  significant  that  during  the  last 
few  years  two  of  our  foremost  college 
presidents,    Nicholas   Murray  Butler 
of  Columbia,  and  James  Roscoe  Day  of 
Syracuse,  have  seen  fit  to  voice  themselves 
in    no    uncertain    terms    regarding    the 
changes  that  they  fear  are  taking  place  in 
the  fundamental  principles  of  government 
in  the  United  States. 

Both  of  these  men  are  thorough  stu- 
dents and  keen  observers  of  American 
history  and  government.  They  believe 
that  the  proposed  changes  will  prove  dis- 
astrous. 

President  Butler  in  the  preface  to  his 
book,  "Why  Should  We  Change  Our 
Form  of  Government?"  says  that  what  he 
has  written  is  based  on  the  conviction  that 
"the  representative  republic  erected  on  the 


FOREWORD 

American  continent  under  the  Constitu- 
tion of  the  United  States  is  a  more  ad- 
vanced, a  more  just  and  a  wiser  form  of 
government  than  the  socialistic  and  direct 
democracy  which  it  is  now  proposed  to 
substitute  for  it."  And  this  is  exactly  the 
attitude  also  of  President  Day  in  his  book 
"The  Raid  On  Prosperity." 

It  is  not  our  purpose  in  the  following 
chapters  to  deal  with  political  speculations 
of  that  nature.  The  significance  of  the 
books  mentioned  lies  in  the  fact  that  they 
are  very  strong  evidence  that  the  changes 
in  political  and  economic  conditions  which 
we  are  now  undergoing  are  so  funda- 
mental and  important  as  to  demand  uni- 
versal attention. 

That  certain  changes  are  taking  place 
is  apparent  to  even  the  most  casual  ob- 
server. What  these  changes  will  mean 
for  humanity  as  a  whole  only  time  and  the 
college  professors  can  tell. 

But  that  certain  of  these  tendencies  will 
affect  in  a  permanent  way  the  value  and 


FOREWORD 

security  of  certain  types  of  investments  is 
something  which  requires  no  more  than  a 
simple  survey  of  the  facts  to  establish.  It 
is  the  purpose  of  the  following  pages  to 
examine  and  analyze  these  tendencies  and, 
without  attempting  to  pass  judgment  as 
to  their  worth  or  expediency  or  justice, 
simply  to  indicate  their  relations  to  the 
types  of  investments  affected  by  them. 

These  are  things  which  every  investor 
should  know  and  understand  thoroughly. 
Deep  seated  and  far  reaching,  they  affect 
fundamental  values  and  are  the  elements 
in  the  safe  investment  of  funds  over  which 
the  individual  has  no  control. 

Every  investor  should  know  these  ten- 
dencies that  he  may  work  with  and  profit 
by  them.  For  to  blindly  ignore  them 
means  certain  loss. 


CHAPTER  I. 

Our  Problem — Plow  the  Study  of  Tenden- 
cies May  be  Utilized. 

IN  reading  the  historian's  analysis 
of  some  great  movement  which  has 
changed  the  course  of  human  events 
one  often  feels  how  simple  it  all  was  and 
how  blind  the  people  of  those  days  must 
have  been  not  to  have  seen  what  was  tak- 
ing place. 

Why  was  the  fading  of  the  "glory  that 
was  Greece  and  the  grandeur  that  was 
Rome"  not  foreseen  and  prevented  by  the 
Aristotles  and  Platos,  the  Ciceros  and 
Caesars,  the  noblemen  of  ancient  history? 
They  were  trained  in  the  philosophy  and 
art  of  government  above  all  men  before  or 
since.  Why  did  they  fail? 

The  reasons  for  the  rise  and  fall  of  the 
Spanish  Empire  seem  perfectly  plain  to- 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

day.  Yet  why  have  the  Spaniards  never 
seen  them  ?  And  why  don't  they  see  them 
now? 

It  is  because  the  historian  looks  back- 
ward through  the  ages  with  an  impartial 
and  a  just  eye.  He  condenses,  classifies 
and  interprets  the  tendencies  of  a  period. 
He  eliminates  the  inconsequential.  Like 
a  visitor  from  another  planet  he  sees 
things  as  they  are. 

The  contemporary,  on  the  other  hand, 
sees  things  as  he  wishes  them  to  be.  He 
is  part  and  parcel  of  the  changes  that  are 
taking  place.  In  the  midst  of  the  trees  he 
cannot  know  the  forest. 

The  tendencies  of  a  period  form  a  com- 
posite picture  of  all  the  tendencies  of  all 
the  individuals  of  the  period.  But  they 
are  so  numerous,  so  complex,  so  contra- 
dictory, so  personal,  that  for  one  who  is 
himself  a  child  of  such  tendencies  to  at- 
tempt to  analyze  and  sort  and  value  them 
is  more  than  futile. 

Today  the  observer  may  note  such  con- 


CONFLICT  OF  TENDENCIES 

tradictory  and  apparently  unrelated  ten- 
dencies as  the  waning  influence  of  the 
church  and  the  decrease  in  drunkenness 
and  immorality,  a  growing-  divorce  rate 
and  a  decreasing  birth  rate,  the  awaken- 
ing of  a  new  business  conscience  and  an 
astonishing  interest  in  the  adventures  of 
\Ynllingford  and  Blackie  Daw,  a  quicken- 
ing of  the  spirit  of  democracy  and  the  wor- 
ship of  the  almighty  dollar,  the  movement 
for  international  disarmament  and  whis- 
pers of  another  great  European  war,  the 
passage  of  corrupt  practices  acts  and  the 
growth  of  the  pension  roll. 

An  attempt  to  say  that  these  tendencies 
and  the  many  others  not  mentioned  taken 
all  together  will  mean  thus  and  so  for 
humanity,  that  they  indicate  that  our 
country  is  on  the  road  to  the  demnition 
bow-wows,  or  that  they  point  the  way  to  a 
new  era  of  Utopian  happiness  would  be  an 
act  of  sheer  madness.  It  is  altogether 
beyond  the  power  of  any  human  being  to 
do  this. 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

It  is  not,  however,  either  impossible  or 
foolhardy  or  difficult  to  analyze  a  partic- 
ular tendency.  Not  for  predicting  what 
its  effect  on  the  course  of  human  events 
will  be.  But  simply  to  learn  its  probable 
effect  on  particular  conditions  closely 
associated  with  it. 

Thus  one  has  only  to  show  that  there  is 
such  a  tendency  in  order  to  prove  that  the 
decrease  in  illiteracy,  for  instance,  will 
stimulate  the  book  business  or  that  the 
lessening  of  drunkenness  will  injure  the 
saloon-keeper. 

Our  problem  here  is  such  a  one.  It  is 
simply  to  select  the  important  present-day 
political  and  economic  tendencies  which 
may  affect  the  value  or  stability  of  differ- 
ent kinds  of  investment  securities  and  to 
point  out  how  these  tendencies  have  af- 
fected securities  in  the  recent  past  and 
what  their  effect  in  the  near  future  is 
likely  to  be. 

We  are  not  going  to  attempt  to  foist  on 
you  another  "investment  system/'  nor  to 

10 


THEORIES  NOT  ALWAYS  PRACTICAL 

prove  by  a  mass  of  charts  and  statistics 
that  "prosperity  runs  in  cycles,"  and  that 
by  simply  following  our  advice  you  can 
invariably  buy  at  the  low  point  and  sell  at 
the  high. 

Too  much  of  that  sort  of  thing  is  being 
done  already.  For  ten  or  fifteen  dollars 
you  can  purchase  the  "services"  of  any 
number  of  statistical  organizations  which 
will  enable  you  to  get  rich  quick  by  play- 
ing the  stock  market  in  accordance  with 
their  advice. 

Just  so  one  learns  from  the  advertise- 
ments that  there  are  any  number  of  phil- 
anthropic gentlemen  who,  for  a  few  paltry 
dollars,  will  teach  anyone  how  to  make  a 
fortune  out  of  a  mail-order  business  or 
poultry  raising  or  squabs  or  bees  or  mush- 
rooms. 

For  our  part  we  often  wonder  why  these 
benevolent  altruists  do  not  take  their  own 
medicine  and  get  rich  themselves  instead 
of  spending  so  much  money  in  clever  ad- 

11 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

vertisements  to  persuade  the  rest  of  us 
to  try  their  experiments. 

We  have  yet  to  find  any  outside  specu- 
lator who  has  beaten  the  stock  market 
game.  And  we  are  inclined  to  think  that 
a  "system"  has  about  as  much  value  there 
as  with  horse-racing  or  poker  or  in  the 
"Green  Room"  at  Monte  Carlo. 

Fluctuations  in  the  market  value  of  a 
bond  listed  on  the  New  York  Stock  Ex- 
change may  have  no  inherent  relation 
whatever  to  the  actual  security  on  which 
the  bond  is  based.  They  may  be  and  gen- 
erally are  the  result  of  manipulation,  the 
law  of  supply  and  demand,  gossip,  rumor 
or  whim.  No  one  can  predict  intelligently 
concerning  these  causes. 

Our  observations,  however,  have  led  us 
to  believe  that  there  are  a  variety  of  eco- 
nomic tendencies  operating  during  any 
period  which  affect  permanently  the  in- 
trinsic value  of  one  class  of  investments  or 
another.  Either  favorably  or  unfavorably. 

Thus  the  growth  of  the  protectionist 

12 


TENDENCY  OF  INVESTMENT  VALUES 

idea  undoubtedly  stimulated  and  strength- 
ened a  great  number  of  industries,  while 
this  same  tendency,  combined  with  another 
contained  in  our  early  navigation  laws, 
played  havoc  with  our  merchant  marine. 

And  we  believe  that  a  careful  analysis 
of  present-day  tendencies  will  indicate  how 
investments  based  on  certain  industries 
are  being  depreciated  in  value  in  a  perma- 
nent and  lasting  way  and  how  other  in- 
vestments, on  the  other  hand,  are  being 
strengthened  and  are  increasing  in  value. 


CHAPTER  II. 

Political  Doctrines  Indicate  Tendencies — 
Radicalism — Government  Regulation — 
Its  Effect  on  the  Railroads — How  Rail- 
road Bonds  Have  Depreciated. 

IN    countries    like   England    and   the 
United  States,  which  are  under  popu- 
lar forms  of  government,  the  political 
parties  form  one  of  the  best  indices  of 
what  changes  are  taking  place.     And  in 
discussing  these  changes  it  will  be  neces- 
sary for  us  to  consider  in  some  degree  the 
various    doctrines    promulgated    by    our 
political  parties. 

But  the  reader  will  please  bear  in  mind 
that  this  is  not  a  political  tract,  and  that 
it  is  not  our  intention  to  go  into  the  merits 
of  any  of  the  questions  considered. 

It  is  our  purpose  simply  to  point  out  in 

15 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

so  far  as  it  is  possible  the  tendencies  of  the 
times  as  evidenced  by  the  trend  of  our 
political  doctrines  and  to  show  what  these 
tendencies  mean  for  the  average  investor. 

Under  a  democratic  government  the 
voters  naturally  divide  themselves  into  two 
great  parties  which,  in  the  last  analysis, 
are  conservative  and  radical. 

In  the  United  States  this  tendency  has 
been  modified  and  retarded  by  the  Civil 
War,  but  of  late  years  the  growth  of  pro- 
gressive or  insurgent  wings  in  both  the 
Democratic  and  Republican  parties  and 
finally  the  split  of  the  latter  into  Progres- 
sives and  Republicans  indicate  strongly 
that  we  are  witnessing  a  new  party  align- 
ment of  conservatives  and  radicals  along 
natural  lines. 

Now,  change  is  inevitable  and  eternal. 
It  goes  on  all  the  time.  Everywhere.  For 
nothing  in  this  world  stands  still. 

And  this  applies  to  politics  as  well  as  to 
industry,  to  human  society  as  well  as  to 
plants  and  animals. 

16 


RADICAL  LEGISLATION  ON  INCREASE 

In  a  complicated  social  system  such  as 
ours,  however,  the  rate  of  change  is  either 
retarded  or  accelerated  according  as  the 
conservative  or  radical  element  is  in  the 
ascendency. 

But  the  trend  of  change,  the  tendencies 
of  the  times,  are  always  directed  or  col- 
ored by  the  radical  element,  whether  it  is 
in  control  or  not. 

The  conservatives  stand  for  the  old 
order  of  things.  They  are  against  change. 
But  even  when  in  power  they  must  com- 
promise with  the  radicals  and  to  some  ex- 
tent comply  with  the  changes  desired  by 
them. 

Thus  during  the  past  few  years  we  have 
seen  a  great  deal  of  radical  legislation  un- 
der a  wholly  conservative  government. 

And  during  the  recent  campaign  each 
of  the  three  great  parties  claimed  to  be 
the  only  true  progressive  party. 

Hence  it  follows  that  we  can  best  ana- 
lyze the  changes  that  are  now  taking  place 
and  predict  those  soon  to  follow  by  study- 

17 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

ing  the  doctrines  of  the  radicals  or  pro- 
gressives in  our  politics. 

Now  the  keynote  of  the  radicalism  of 
this  period — and  mind  you,  we  do  not  use 
the  term  "radicalism,"  in  a  derogatory 
sense,  for  it  is  clear  that  all  the  true 
progress  in  history  has  come  through  rad- 
icalism— the  keynote  of  this  movement, 
whether  it  calls  itself  Progressive,  Repub- 
lican, Democratic  or  Socialist,  is  contained 
in  the  expression,  "human  rights  versus 
property  rights." 

And  this  simply  means  that  the  eco- 
nomic forces  and  freedom  of  contract 
under  which  our  industrial  system  would 
naturally  grow  up  are  to  be  modified  by 
government  interference  in  such  a  way 
that  humanity  in  general  and  the  laboring 
classes  in  particular  will  be  benefited  and 
improved. 

And  this  is  to  be  done  by  regulating  the 
competition  of  our  industries  with  those  of 
foreign  countries  and  by  fixing  transpor- 

18 


STEPS  IN  GOVERNMENT  REGULATION 

tation  rates,  hours  of  work,  wages  and 
prices. 

Without  regard  for  its  effect  on  human- 
ity in  general  our  purpose  here  is  simply 
to  ascertain  what  will  be  the  effect  of  this 
policy  on  investment  securities. 

The  first  step  in  this  policy  of  govern- 
ment regulation  was  taken  in  the  early 
days  of  our  history  in  the  passage  of  the 
navigation  acts  and  the  initial  protective 
tariff  laws.  The  purpose  of  this  legisla- 
tion was  to  stimulate  and  to  direct  along 
certain  lines  the  industrial  activities  of  the 
country. 

Next  came  the  interstate  commerce  laws 
and  the  establishment  of  the  Interstate 
Commerce  Commission  with  power  to 
regulate  freight  rates. 

And  this  was  followed  by  a  mass  of  leg- 
islation in  the  States  regulating,  or  rather 
reducing,  passenger  rates  and  regulating 
the  railroad  business  in  many  other  ways. 

It  is  not  necessary  for  us  to  trace  the 

19 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

history  of  this  restrictive  legislation,  for  it 
is  so  recent  as  to  be  familiar  to  everyone. 

Much  of  it  has  doubtless  been  remedial 
and  salutary.  And  in  these  days  to  ques- 
tion the  efficacy  of  the  Interstate  Com- 
merce Commission  would  be  the  rankest 
heresy,  for  it  is  reported  from  time  to 
time  that  even  the  railroad  men  themselves 
consider  it  a  godsend  to  the  business. 

On  the  other  hand,  a  great  deal  of  this 
legislation  has  been  purely  mischievous 
and  meddlesome,  if  not  absolutely  vicious. 

The  Texas  Legislature,  for  example, 
passed  a  law  making  it  a  criminal  offense 
for  a  train  to  be  late. 

And  the  Arizona  Legislature,  at  its  first 
sitting,  practically  without  inquiry  or  in- 
vestigation of  any  kind,  passed  a  series  of 
railroad  bills  which,  considering  the  needs 
of  the  State,  probably  reach  the  limit  of 
folly  and  stupidity. 

These  Acts  provided  for  a  reduction  of 
passenger  rates  on  all  roads  in  the  State 
to  three  cents  a  mile.  A  cut  of  forty  per 
20 


ACTS  OF  ARIZONA  LEGISLATURE 

cent  for  branch  lines  and  twenty-five  per 
cent  for  main  lines. 

Required  an  extra  man  on  light  engines, 
that  is,  engines  that  are  not  pulling  cars. 
To  find  a  plausible  reason  for  this  bill  is  a 
problem  for  the  ages. 

Required  electric  headlights  on  all  loco- 
motives. This  is  the  strongest  headlight 
made  and  is  probably  the  best  for  a  single- 
track  road.  But  on  double-track  it  is  a 
positive  danger.  Four  other  States  have 
forbidden  the  railroads  to  use  this  kind  of 
headlight  on  double-track  roads. 

Another  Act  limited  the  number  of  cars 
to  a  train  to  seventy.  And  others  provided 
for  a  semi-monthly  pay-day  and  required 
all  engineers  and  conductors  to  have  three 
years'  previous  experience. 

"It  is  said  that  these  bills  originated  with 
a  discharged  employe  of  the  Southern 
Pacific  Railroad,  and  the  electric  headlight 
bill  was  obviously  dictated  by  the  Pyle 
Company,  which  owns  all  the  patents  for 
high  candle-power  electric  headlights. 
21 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

Rumor  has  it  that  to  make  assurance 
doubly  sure  this  company's  representative 
sat  in  the  halls  of  the  Legislature  while  the 
bill  was  being  passed. 

But  whether  all  this  is  true  or  not  makes 
no  difference,  for  these  bills  represent  the 
wishes  of  a  majority  of  the  people  of  the 
State.  On  November  5th  they  were  sub- 
mitted to  the  popular  vote  by  means  of 
referendum  petitions. 

And  all  except  the  bill  requiring  an  ex- 
tra man  on  light  engines  and  the  three- 
year  experience  bill  were  upheld  and  are 
now  duly  incorporated  in  the  statutes  of 
the  sovereign  State. 

They  tell  a  story  down  there  now,  that 
is,  the  railroad  men  do,  about  a  young  man 
who  went  to  President  Wilde  of  the  Uni- 
versity of  Arizona  and  said  that  he  wanted 
to  learn  the  railroad  business,  both  prac- 
tically and  theoretically,  from  the  ground 
up,  and  wanted  to  know  if  the  university 
had  such  a  course. 

22 


COURSE  OF  RAILROAD  INSTRUCTION 

Dr.  Wilde  said  that  he  thought  it  could 
be  arranged. 

"Well,  what  will  it  cost  and  how  long 
will  it  take  ?"  asked  the  young  man. 

The  Doctor  replied  that  it  all  depended 
on  how  much  he  wanted  to  learn.  If  he 
wanted  to  know  as  much  about  the  rail- 
road business  as  men  who  had  spent  their 
lives  at  it,  such  as  the  division  superin- 
tendents for  example,  it  would  take  him 
about  ten  years  and  cost  about  ten  thou- 
sand dollars. 

But  if  he  only  wanted  to  know  as  much 
about  railroading  as  the  first  State  Legis- 
lature of  Arizona  he  thought  it  would  take 
about  fifteen  minutes  and  cost  just  sev- 
enty-five cents. 

Texas  and  Arizona  are  examples,  per- 
haps somewhat  exaggerated,  of  a  policy 
that  is  being  applied  in  every  State  in  the 
Union. 

What  the  net  result  of  this  policy  of 
regulation  will  be  for  the  people  as  a  whole 
no  one  can  say  for  many  years  to  come. 

23 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

It  has  reduced  freight  and  passenger 
rates,  abolished  rebates  and  forced  the 
railroads  to  establish  block  signal  systems 
and  take  numerous  other  measures  of  a 
similar  nature.  All  of  which  is  appar- 
ently for  the  common  good. 

But  its  effect  on  the  profits  of  the  rail- 
roads, their  credit  standing,  the  market 
value  of  their  securities  and  the  progress 
of  railroad  development  is  perfectly  plain 
and  obvious  to  anyone  who  will  take  the 
trouble  to  look  into  the  facts. 

Mr.  B.  F.  Yoakum,  head  of  the  Frisco 
System,  writing  in ,  a  recent  number  of 
World's  Work  on  the  "High  Cost  of  Rail- 
roading," graphically  pictures  the  critical 
situation  which  the  railroad  industry  now 
faces. 

He  first  treats  of  the  rise  in  the  wage 
scale  and  shows  that  since  1899  the  price 
of  railroad  labor  has  risen  33>3%.  Or, 
in  other  words,  the  amount  of  railroad 
labor  which  could  be  bought  in  1911  for 

24 


INCREASED  COST  OF  RAILROADING 

$100  could  have  been  purchased  in  1899 
for  $75. 

In  1911  the  railroads  employed  about 
1,700,000  men  and  paid  them  in  wages 
$1,200,000,000.  If  the  wage  schedule  of 
1899  had  prevailed  in  1911  these  same  men 
could  have  been  employed  to  do  the  same 
amount  of  work  for  $900,000,000. 

So  it  cost  the  railroads  $300,000,000 
more  to  move  the  same  amount  of  traffic 
than  it  would  have  cost  them  under  the 
old  schedule.  And  $300,000,000  is  a  sum 
greater  than  the  total  net  dividends  earned 
and  paid  by  all  the  railroads  in  the  United 
States  in  1910. 

The  cost  of  fuel  has  increased  in  the 
same  way.  In  1911  $8.05  out  of  every 
hundred  dollars  earned  by  the  railroads 
went  to  pay  coal  bills.  In  1900  this  item 
represented  only  $6.09  in  every  hundred 
dollars  of  earnings. 

If  coal  could  have  been  bought  at  the 
old  rate  this  would  have  meant  a  saving  of 
nearly  $60,000,000  for  the  entire  industry. 

25 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

With  the  exception  of  steel  rails,  which 
have  remained  stationary  at  $28  a  ton,  all 
of  the  other  commodities  which  the  rail- 
roads use  for  ordinary  maintenance  and 
reconstruction  work  have  risen  enor- 
mously in  price. 

Taxes,  too,  have  almost  doubled.  In 
1899  every  mile  of  railroad  paid  an  aver- 
age of  $247  in  taxes.  In  191 1,  $446.  For 
the  industry  as  a  whole  this  has  meant  an 
increase  of  some  $63,000,000. 

Another  important  item  is  that  of  loss 
and  damage  claims,  which  have  increased 
in  amount  about  six  times  as  fast  as 
freight  tonnage.  A  loss  for  the  railroads 
of  something  like  $21,000,000  if  figured 
on  the  1899  basis. 

All  of  these  items  taken  together  repre- 
sent an  increased  cost  of  over  $400,000,- 
000  annually. 

Moreover,  in  the  past  eight  or  nine  years 
there  have  been  small  but  gradual  reduc- 
tions in  both  freight  and  passenger  rates. 
These  reductions  have  not  been  large  at 

26 


REDUCTION  IN  RATES 

any  one  time,  but  there  has  been  a  constant 
lowering  of  rates  on  different  articles  due 
to  rulings  by  Federal  and  State  authorities, 
until  the  shrinkage  as  compared  to  the  old 
rates  amounts  to  about  $135,000,000. 

The  lowering  of  rates  and  the  increased 
cost  of  operation,  therefore,  make  an  an- 
nual difference  of  about  $535,000,000  in 
net  railroad  earnings. 

Every  investor  must  realize  as  a  funda- 
mental proposition  that  his  protection  lies 
wholly  in  net  earnings. 

It  is  not  the  cost  of  construction  or  the 
cost  of  reproduction  that  determines  the 
real  value  of  a  property  for  the  investor. 
It  is  the  ability  of  that  property  to  earn 
interest  and  dividends. 

The  bonds  of  a  railroad  which  cost  one 
million  dollars  in  1900  and  would  cost  two 
million  to  reproduce  today,  will  not  be 
worth  much  unless  that  railroad  is  produc- 
ing earnings. 

And  a  railroad  that  is  earning  $50,000 
annually,  capitalized  at  5  per  cent,  is  worth 

27 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

one  million  dollars,  irrespective  of  what  it 
originally  cost  or  what  it  could  be  repro- 
duced for. 

So  that  every  dollar  of  earnings  repre- 
sents twenty  dollars  of  value. 

And  when  it  is  said  that  the  earnings  of 
the  railroad  industry  have  been  curtailed 
to  the  extent  of  five  hundred  and  thirty- 
five  million  dollars  it  means  that  the  value 
of  the  industry  as  a  whole  has  been 
reduced  by  just  twenty  times  that  sum. 

Up  to  the  present  time  the  increase  in 
operating  expense  and  the  reductions  in 
rates  have  largely  been  met  by  a  constant 
saving  in  the  actual  cost  of  moving  freight 
and  passengers. 

Locomotives  have  been  built  heavier 
and  larger,  the  capacity  of  cars  has  been 
increased  and  longer  trains  have  been 
hauled. 

But  the  power  to  economize  along  this 
line  has  about  reached  its  limit.  And  it  is 
the  opinion  of  those  railroad  experts  who 
are  best  fitted  to  know  that  further  de- 

28 


NET   EARNINGS   DECREASING  RAPIDLY 

crease  in  earnings  cannot  be  met  through 
savings  effected  through  mechanical  ways 
and  means. 

And  this  is  confirmed  by  the  figures  for 
railroad  earnings  for  the  last  three  years. 

In  1909  the  railroads  earned  two  billion 
six  hundred  and  seven  million  dollars 
gross  and  eight  hundred  and  thirteen  mil- 
lion dollars  net. 

In  1911  the  gross  earnings  increased 
with  the  increase  in  traffic  to  two  billion 
eight  hundred  and  fourteen  million  dollars 
and  the  net  amounted  to  seven  hundred 
and  seventy-one  million. 

Thus  the  most  recent  figures  obtainable 
show  during  three  years  an  increase  of 
two  hundred  and  seven  millions  in  gross 
earnings.  While  the  net  actually  de- 
creased by  forty-three  millions. 

This  indicates  that  conditions  in  the 
railroad  business  are  not  growing  better. 
If  anything  the  contrary  is  the  case. 

Very  naturally  railroad  development  is 
practically  at  a  standstill. 

29 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

Texas,  which  has  been  one  of  the  leaders 
in  radical  railroad  legislation,  built  less 
than  twenty  miles  of  new  road  during  the 
whole  of  1912,  whereas  before  the  regula- 
tion policy  was  adopted  600  miles  was  the 
average.  It  is  estimated  that  the  State 
should  have  10,000  miles  of  new  railroads 
to  adequately  meet  its  growing  needs. 

For  the  past  thirty  years  the  whole 
country  has  been  building  new  roads  at 
the  rate  of  6,000  miles  a  year.  Today  the 
only  expansion  is  a  matter  of  little  exten- 
sions of  spurs  and  feeders  into  sections  of 
proven  richness. 

No  new  lines  of  importance  are  being 
projected. 

The  effect  of  these  conditions  on  rail- 
road securities  is  too  familiar  for  extended 
comment. 

It  is  just  exactly  what  the  investor  of 
ten  or  fifteen  years  ago  might  have  fore- 
seen had  he  informed  himself  concerning 
the  tendencies  of  the  times. 

An  essay  published  as  long  ago  as  1887 
by  Prof.  William  Graham  Sumner,  the 

30 


DEPRECIATION  OF  RAILROAD  BONDS 

noted  Yale  lecturer,  on  Economics  and 
Sociology,  indicates  that  this  keen  ob- 
server foresaw  clearly  what  would  happen 
with  the  development  of  the  policy  of  gov- 
ernment regulation. 

Investors  of  the  present  must  profit  by 
this  experience.  The  great  tendencies  of 
the  day  are  as  obvious  as  daylight  and 
their  effect  on  investment  securities  is 
equally  so. 

The  appended  table  is  a  graphic  illus- 
tration of  what  has  happened  and  is  still 
happening  in  the  case  of  standard  railroad 
bonds. 

Those  listed  have  depreciated  in  value 
since  1899  an  average  of  over  ten  per  cent. 

It  is  our  opinion,  however,  that  the 
actual  intrinsic  value  of  railroads  as  secu- 
rity for  investment  bonds  has  depreciated 
a  good  deal  more  than  ten  per  cent. 

The  reasons  that  the  bonds  themselves 
have  not  fallen  in  value  to  a  greater  extent 
are  two.  First,  because  investors  have 
been  slow  to  change  their  good  opinion  of 
this  class  of  bond.  Its  reputation  was 

31 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

established  a  good  many  years  ago  when 
conditions  in  the  railroad  business  were 
very  materially  different  from  those  at 
present,  and  the  tendency  of  investors 
has  been  to  continue  taking  this  reputation 
for  granted. 

How  Some  Railroad  Bonds  Have 
Depreciated. 


Security 

1899 

1912 

Loss 

Atch.,  Top.  &  Santa  Fe  Ry. 
Gen    g   4s,  1995  

99 

06* 

2^ 

Baltimore  &  Ohio. 
Prior  Lien  3^s,  1925  
Chicago,  Mil.  &  St.  Paul. 
Gen.  g.  4s,  Series  A,  1989 
Chicago  &  Northwestern. 
Gen    g    3^s    1987  

95 

108^ 
107^ 

84 

23  y2 

Illinois  Central. 
1st  g   3^25    1951 

104 

91 

13 

N.  Y.  C.  &  Hudson  River. 
G    mtg    3^28    1997 

109 

*Penn.  R.  R.  Co. 
Consol    g    4s,  1997  

106 

102^ 

. 

**Southern  Pacific. 
1st  gtd.  ref.  mtg.  4s,  1995 
Wabash. 
1st  g    5s    1939 

113 

105 

8 

*Issued  1903.     **Issued  1905. 


32 


LAWS  GIVE  BONDS  FICTITIOUS  VALUE 

And,  second,  because  railroad  bonds  are 
to  some  degree  given  a  fictitious  value  by 
the  banking  and  insurance  laws  of  many 
States.  These  laws  stipulate  strictly  the 
kinds  of  investments  which  may  be  pur- 
chased by  savings  banks  and  insurance 
companies.  The  laws  were  passed  when 
railroad  bonds  were  a  very  high  type  of 
investment  and  they  were  consequently 
placed  among  the  first  on  the  list. 

This  has  forced  a  great  demand  for 
these  bonds,  thus  keeping  the  price  higher 
than  would  naturally  be  the  case. 

Just  so  the  Federal  banking  and  cur- 
rency laws  have  created  a  fictitious  mar- 
ket and  price  for  government  bonds  by 
making  it  necessary  for  national  banks  to 
purchase  them  for  deposit  as  security  in 
the  issue  of  bank  notes. 

It  is  by  no  means  our  opinion  that  the 
great  railroad  systems  are  going  to  be 
forced  to  the  wall  by  hostile  and  restrictive 
legislation  in  the  next  few  years. 

In  fact,  there  are  strong  indications  of  a 
reaction  against  such  legislation. 

33 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

For  example,  it  is  reported  that  the  dom- 
inant political  party  in  Texas  has  incor- 
porated in  its  platform  a  plank  expressly 
condemning  the  State's  past  anti-railroad 
policy. 

And  there  is  undoubtedly  a  strong  cur- 
rent of  opinion  in  this  direction  through- 
out the  whole  country. 

But  this  is  a  reaction  against  "fool"  leg- 
islation only.  It  means  that  the  era  of 
unreasonable  and  vicious  laws  is  passing. 

But  there  is  not  the  slightest  indication 
of  a  rejection  of  the  general  policy  of  gov- 
ernment regulation.  Quite  the  contrary 
is  the  case. 

This  policy  has  been  irretrievably 
adopted  by  the  American  people.  From 
now  on  it  will  be  applied  in  a  more  sensible 
manner.  But  it  is  not  going  to  be  dis- 
carded or  restricted  simply  to  the  rail- 
roads. 

It  is  going  to  be  extended. 

Railroad  rates  will  continue  to  be  fixed, 
not  by  competition  and  the  natural  play  of 

34 


NEW  CONDITIONS  MEAN   LOWER  VALUES 

economic  forces,  but  by  State  and  Federal 
Commissions. 

And  however  sensibly  this  policy  may 
be  applied  or  however  beneficent  it  may  be 
for  the  country  as  a  whole,  it  means  just 
one  thing  for  the  investor. 

It  means  that  the  era  of  high  profits  in 
railroading  is  past.  It  means  that  re- 
quirements for  safety  appliances  and  other 
betterments  will  greatly  add  to  the  over- 
head operating  expense  of  the  business, 
while  freight  and  passenger  rates  are  held 
stationary  or  reduced  until  the  net  earn- 
ings of  the  industry  reach  the  lowest  pos- 
sible point  consistent  with  solvency. 

Railroad  bonds  will  always  be  good 
"fair-weather"  bonds  and  their  ready  mar- 
ketability will  keep  them  in  favor  -with 
banks  and  other  investors  for  whom  it  is 
imperative  that  their  assets  be  always  as 
"quick"  as  possible. 

But  every  investor  must  realize  that  the 
new  conditions  have  enormously  impaired 
the  safety  of  these  bonds. 

35 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

And  that  panics,  industrial  depressions, 
short  crops,  wars  or  other  adverse  condi- 
tions will  have  greater  and  greater  power 
to  injure  the  railroad  business  and  to  de- 
preciate the  securities  based  upon  it  to  a 
much  greater  extent  than  has  ever  been 
the  case  before. 


CHAPTER  III. 

Effect  of  Government  Regulation  on  Pub- 
lic Utilities — Three-Cent  Car  Fares — 
Regulation  of  Express  Companies. 

IT  is  not  possible  to  investigate  the 
effect  of  government  regulation  on 
public  utilities  as  closely  as  we  have 
done  in  the  case  of  the  railroads.  For  the 
agencies  of  government  regulation  in  this 
case  are  a  multitude  of  State  and  City  com- 
missions instead  of  a  single  Federal  body, 
and  their  reports  and  statistics  are  not 
readily  available.  Moreover,  the  policy  of 
government  regulation  has  been  applied 
much  more  extensively  and  during  a 
longer  period  to  the  railroads  than  has 
been  the  case  with  the  various  industries 
classed  as  public  utilities. 

But  the  analogy  between  the  situation  in 
the   railroad  business   and  conditions   in 

37 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

these  other  industries  is  so  close  that  for 
our  present  purpose  very  little  beyond  a 
simple  reference  to  this  analogy  is  neces- 
sary or  desirable. 

In  nearly  every  State  and  in  most  of  our 
large  cities  today  there  are  Corporation 
Commissions  or  Public  Service  Commis- 
sions whose  duties  comprehend  the  fixing 
of  rates  and  supervision  of  public  utility 
corporations,  such  as  gas,  electric  lighting, 
street  car,  telephone  and  water  companies. 

The  ultimate  purpose  of  these  commis- 
sions is  the  regulation  of  rates  and  charges 
of  the  industries  within  the  scope  of  their 
authority.  And  the  practical  meaning  of 
rate  regulation  is  rate  reduction. 

It  must  be  understood  that  the  natural, 
almost  the  inevitable,  result  of  rate  regula- 
tion by  a  body  of  men  accountable  to  the 
people  at  large  will  be  regulation  of  a  sort 
that  the  people  at  large  believe  for  their 
best  interests.  And  this  must  always 
mean  regulation  of  rates  downward. 

For  on  the  surface  of  things  nothing 

38 


REGULATION  RETARDS  DEVELOPMENT 

seems  more  apparent  than  that  a  reduction 
of  rates  or  prices  must  benefit  the  majority 
of  people,  whatever  harm  it  may  do  to  a 
small  minority.  Thus  the  people  of  Ari- 
zona and  Texas  have  been  unable  to  see 
why  they  should  not  have  as  low  railroad 
rates  as  New  York  and  Massachusetts. 

Rates  are  the  surface  manifestations. 
The  effect  of  regulation  on  the  develop- 
ment of.  an  industry  or  a  State  and  on  the 
investment  of  capital  is  apparently  too 
deep  below  the  surface  of  things  to  be  un- 
derstood or  seriously  considered. 

The  reduction  of  public  utility  rates  is 
going  on  everywhere  the  whole  country 
over.  Already  a  number  of  cities  have 
three-cent  street  car  fares. 

And  if  the  present  agitation  for  a  three- 
cent  coin  is  successful,  as  it  doubtless  ulti- 
mately will  be,  we  may  expect  that  street 
railway  companies  generally  throughout 
the  country  will  be  forced  to  make  this 
reduction.  To  the  public  the  difference 
between  five-cent  and  three-cent  fares 

39 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

seems  very  small.  But  it  means  a  reduc- 
tion of  40%  in  the  gross  earnings  of  the 
industry  concerned. 

The  cost  of  operating  public  utilities  has 
increased  in  the  same  way  that  the  cost  of 
railroading  has.  Taxes  also  have  in- 
creased enormously.  Up  to  now  these  in- 
dustries have  been  able  to  meet  much  of 
this  increased  expense  by  improvement  in 
mechanical  ways  and  means. 

For  example,  in  the  street  railway  busi- 
ness, double  tracks,  larger  cars  and  the 
pay-as-you-enter  improvement. 

But  the  law  of  diminishing  returns 
makes  it  certain  that  this  cannot  continue 
much  longer.  Each  new  improvement 
costs  more  and  saves  less.  In  the  end  the 
increasing  cost  of  operation  must  come  out 
of  earnings. 

The  appended  table  shows  the  deprecia- 
tion which  has  taken  place  in  a  number  of 
standard  listed  public  utility  bonds  be- 
tween 1899  and  1912. 


40 


SIGNIFICANT  FIGURES 


Depreciation  of  Standard  Public 
Utilities. 


Security 

1899 

1912 

Loss 

Brooklyn  Rapid  Transit. 
Gen    5s,  1945  

105^ 

102J/2 

3 

Brooklyn  Rapid  Transit. 
1st  ref.  cons.  g.  4s,  2002. 
Issue  1902 

111 

92 

19 

*Detroit  United  Rys. 
1st  con.  g.  4J/£s,  1932. 
Issue  1902   

96  V2 

73^ 

23 

Interborough  Met. 
Col.  tr.  g.  4^s,  1956. 
Issue    1906  

90  1A 

80->4 

9J/2 

New  Orleans  Ry.  &  Lt. 
4l/2s,  1935.      Issue   1905.  . 
United  Rys.  of  St.  Louis. 
1st  g    4s    1934  

92J4 
94 

86 
73^4 

6J4 

20*4 

**United  Rys.  of  S.  Francisco. 
S.  F.  4s,  1927.    Issue  1902 
Brooklyn  Union  Gas  Co. 
1st  con.  g.  5s,  1945  
Laclede  Gaslight  Co.,  St.  L. 
1st  g    5s    1919  

80'4 
116 
107^2 

67 
106^ 
101  *4 

I3tf 

9% 
6J4 

People's  Gas  &  Coke  Co. 
1st  con.  g.  5s,  1943  

120 

115% 

4^ 

*First  quotation  1905.     **First  quotation  1903. 

Note. — Where  above  securities  were  issued  later 
than  1899  the  first  quotation  is  of  the  year  of  issue 
unless  otherwise  noted. 

41 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

Entering  into  the  causes  of  this  depre- 
ciation are  other  factors  besides  govern- 
ment regulation.  The  rates  charged  by 
some  of  these  corporations  have  never 
been  reduced  at  all  by  government  inter- 
ference. Yet  we  believe  this  policy  to 
have  been  the  main  factor  in  depreciating 
these  bonds  as  a  class. 

For,  although  applied  only  in  individual 
cases,  the  possibility  of  its  general  applica- 
tion has  harmed  the  credit  of  all  public 
service  industries. 

Government  regulation  seeks  only  to  ait 
rates.  It  inevitably  reduces  net  earnings, 
injures  the  credit  and  depreciates  the  se- 
curities of  the  industries  subject  to  regula- 
tion. 

In  dealing  with  this  subject  the  reader 
must  discriminate  between  his  interests  as 
an  investor  and  his  interests  as  a  citizen. 
We  are  discussing  here  neither  the  morals 
nor  the  economics  of  government  regula- 
tion. But,  simply  accepting  it  as  a  fact, 

42 


EXPRESS  COMPANIES  AFFECTED 

we  seek  to  discover  its  effect  on  invest- 
ment securities. 

The  express  companies  have  lately  been 
found  to  be  within  the  scope  of  the  Inter- 
state Commerce  Commission's  authority. 
The  regulations  forced  upon  them  have 
enormously  increased  the  efficiency  of 
their  service  to  the  public.  No  one  can 
deny  this. 

As  yet  little  has  been  done  in  the  way  of 
rate  regulation.  But  much  may  be  ex- 
pected. 

These  small  beginnings  are  of  the  great- 
est importance  to  investors  in  express 
company  securities,  for  they  indicate  that 
the  era  of  great  profits  in  the  express 
business  is  at  an  end  and  that  the  earnings 
of  the  business  will  be  curtailed  by  gQv- 
ernment  regulation  with  a  consequent  in- 
jury to  the  value  and  safety  of  express 
company  securities. 


43 


CHAPTER  IV. 

Extension   of  Government  Regulation— 
The     Trust     Problem  —  Hoiv     Trust 
Securities  Will  Be  Affected. 

AT  this  point  it  is  necessary  to  warn 
the  reader   again   against  letting 
his  own  prejudices  or  politics  or 
desires  color  his  analysis  of  the  conditions 
affecting  his  investment  interests. 

He  must  see  things  as  they  are,  not  as 
he  wishes  them  to  be. 

The  policy  of  government  regulation 
has  been  of  inestimable  benefit  to  Amer- 
ican laborers — men,  women  and  children. 
It  has  shortened  hours  of  work,  provided 
for  compensation  in  case  of  accident,  and 
brought  on  a  new  era  of  sanitation  and 
safety. 

But  for  the  purposes  of  our  present  in- 
quiry all  this  is  aside  from  the  point. 

45 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

We  are  concerned  with,  just  this  one 
fact,  that,  wherever  and  however  govern- 
ment regulation  has  been  applied.it  has  re- 
sulted inevitably  in  increasing  the  operat- 
ing expenses  and  decreasing  the  profits  of 
the  industries  regulated. 

And  this  in  turn  has  caused  a  deprecia- 
tion of  the  bonds  or  stocks  based  on  these 
industries. 

For,  as  has  been  pointed  out  heretofore, 
it  is  fundamental  that  the  one  factor  which 
finally  determines  the  margin  of  safety  of 
an  investment  is  profits  or  net  earnings. 
And  when  profits  are  cut  the  investment 
must  depreciate. 

We  have  seen  how  this  policy  has  been 
applied  to  the  railroads  and  to  the  various 
public  utility  industries  and  how  it  is  now 
about  to  be  applied  to  the  express  com- 
panies. 

Let  us  see  what  extensions  of  the  policy 
may  be  expected. 

One  of  the  great  problems  before  the 
country  today  is  that  of  the  trusts.  And 

46 


EFFORTS  AT  TRUST  CONTROL 

many  methods  of  solving  this  problem 
have  been  proposed.  Federal  incorpora- 
tion, the  Sherman  anti-trust  law,  a  Corpo- 
ration Commission,  regulation  of  competi- 
tion, and  government  ownership,  are  some 
of  these  methods. 

During  the  recent  presidential  campaign 
this  subject  was  given  especial  attention 
by  the  Socialist  party  and  the  Progressive 
party.  And  these  two  parties  are  the  rad- 
ical elements  in  our  politics. 

The  one  stands  for  government  owner- 
ship and  the  other  for  a  Federal  Corpora- 
tion Commission. 

Inasmuch  as  neither  of  the  other  two 
parties  seems  to  have  reached  any  really 
definite  conclusions  as  to  trust  control,  we 
may  expect  that  no  matter  what  party  is 
in  power  the  ideas  of  the  radicals  will  have 
great  weight  in  finally  shaping  the  govern- 
ment's policy  toward  the  trusts. 

It  is  more  than  likely  that  some  modifi- 
cation of  the  Federal  Corporation  Commis- 

47 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

sion,  proposed  by  the  Progressives,  will 
ultimately  be  the  means  adopted. 

The  Interstate  Commerce  Commission 
is  a  precedent  in  this  direction  and  its  suc- 
cess in  dealing  with  the  railroad  problem, 
to  the  satisfaction  of  the  people,  makes  it 
extremely  unlikely  that  anything  else  will 
be  tried  in  dealing  with  the  trust  problem. 

That  this  will  ultimately  result  in  regu- 
lation by  the  government  of  both  wages 
and  prices  in  our  great  trust  industries  is 
our  opinion. 

This  is  what  has  happened  in  the  rail- 
road industry  and  this  is  the  solution  of 
the  trust  problem  advanced  by  the  Pro- 
gressive party. 

In  making  a  prediction  as  to  the  direc- 
tion a  tendency  is  likely  to  take,  one  must 
lay  special  stress  on  the  program  of  the 
radical  element.  This  element,  whether 
in  power  or  not,  always  either  colors  or 
directs  the  changes  in  government  policy. 

Just  so  the  radical  Western  States  in- 
itiate new  ideas  such  as  equal  suffrage, 

48 


WESTERN  STATES  MORE  PROGRESSIVE 

the  single  tax,  the  initiative,  referendum 
and  recall,  and  these  ideas  gradually 
spread  to  the  more  conservative  Eastern 
States. 

To  learn  what  the  principles  of  govern- 
ment in  Massachusetts  a  hundred  years 
hence  will  be,  one  must  study  the  tenden- 
cies in  Oregon  today.  To  predict  what 
conservatism  will  mean  in  the  years  to 
come  one  needs  only  to  define  correctly  the 
radicalism  of  the  present. 

During  the  recent  campaign  the  Pro- 
gressive party  stood  for  a  Federal  Corpo- 
ration Commission.  The  purposes  and 
powers  of  this  Commission  were  definitely 
set  forth  in  an  editorial  in  the  September 
28th  number  of  the  Outlook,  the  acknowl- 
edged party  organ,  from  which  we  quote 
as  follows: 

"It  (the  Commission)  proposes  to 
say  to  the  person,  whether  corporate 
or  individual,  You  shall  not  control 
the  prices,  ^ve  will  control  them;  you 
shall  not  deteriorate  the  quality,  we 

49. 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

will  punish  you  if  you  do  not  keep  the 
quality  up  to  our  standards ;  you  shall 
not  impose  on  your  working  people 
any  conditions  you  like,  you  shall  pro- 
vide such  wages,  hours  and  conditions 
of  labor  as  we  prescribe,  etc." 

And  we  believe  that  some  modification 
of  this  plan  will  ultimately  be  tried. 

But  whether  this  prediction  as  to  the 
form  that  government  regulation  of  the 
trusts  will  take  is  correct  or  not  makes 
little  difference  for  the  purposes  of  our 
present  inquiry. 

The  point  is  that  regulation  of  our  big 
industries  in  some  form  or  other  is  a  prac- 
tical certainty  in  the  very  near  future. 

And  to  understand  what  effect  this  will 
have  on  the  investment  securities  based  on 
these  industries  one  only  has  to  consider 
what  has  already  happened  in  the  railroad 
field. 

However  great  a  boon  legislation  insti- 
tuting shorter  hours  for  labor,  minimum 

50 


DEVELOPMENT  SLOW  BUT  SURE 

wage  scales,  employers'  liability,  compen- 
sation for  injured  employes,  safety  and 
sanitary  appliances,  regulation  of  competi- 
tion, regulation  of  prices,  or  regulation  of 
wages  may  be  for  the  country  as  a  whole, 
the  result  of  such  legislation  for  the  indus- 
tries affected  is  perfectly  plain  and 
obvious. 

Overhead  and  operating  expenses  will 
be  increased  or  income  curtailed  so  that 
net  earnings  will  inevitably  be  reduced. 

And  a  reduction  of  net  earnings  will 
mean  a  depreciation  of  the  securities  de- 
pending on  these  earnings  for  their  safety. 

This  policy  of  trust  control  and  indus- 
trial benevolence  will  continue  to  develop 
slowly  but  surely,  just  as  has  been  the  case 
up  to  date.  Its  effect  on  the  great  indus- 
tries will  not  be  noticeable  for  five,  ten  or 
perhaps  fifteen  years. 

But  its  result  is  an  absolute  certainty 
and  must  be  taken  into  consideration  by 
the  intelligent  investor,  whatever  his  per- 

51 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

sonal  sentiments  in  favor  of  or  opposition 
to  the  policy  of  regulation  may  be. 

The  bonds  and  stocks  of  the  country's 
great  industries  are  certain  to  suffer  de- 
preciation in  value  through  the  application 
of  the  policy  of  government  regulation, 
just  as  railroad  securities  have  done. 


52 


CHAPTER  V. 

Socialism — What  It  Is — A  Modification 
— Effect  on  Investment  Securities. 


i 


increasing  Socialist  vote  in 
this  country  and  the  wide  spread 
of  Socialism  over  the  whole  world 
makes  necessary  a  word  here  concerning 
the  effect  that  Socialism  would  probably 
have  on  investment  securities. 

In  the  first  place,  the  reader  will  please 
rid  himself  of  the  idea  that  Socialism 
means  the  confiscation  of  all  property  by 
the  government  and  a  new  distribution  of 
it  on  an  equal  per  capita  basis;  or  that 
Socialism  has  any  necessary  connection 
with  dynamite,  assassination  or  anarchy. 

Socialism  simply  aims  to  substitute  some 
form  of  government  interference  for  free 
contract,  competition  and  the  other  nat- 
ural economic  forces  in  fixing  the  relations 

53 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

of  the  different  organs  and  classes  of 
society  to  one  another. 

It  will  regulate  the  prices  of  commodi- 
ties and  services  and  the  wages  of  all  the 
members  of  society.  It  will  fix  transpor- 
tation rates  and  the  cost  of  bread  and  steel 
rails,  the  wages  of  laborers,  promoters, 
doctors  and  lawyers. 

All  this  as  a  substitute  for  allowing  each 
to  get  as  much  as  possible  for  his  labor  or 
product  or  services  in  the  competition  of 
life  with  all  the  other  members  of  society. 

However  much  one  may  disagree  with 
this  idea  it  must  be  admitted  that,  accord- 
ing to  its  light,  it  is  rational  and  aims  at 
the  welfare  of  all. 

It  is  only  a  step  or  two  further  in  the 
direction  in  which  the  thoughts  of  the  peo- 
ple are  already  turned. 

It  is  the  policy  of  government  regulation 
carried  out  to  its  fullest  extent  and  to  a 
logical  conclusion. 

In  an  interview  on  the  business  situation 
published  in  the  March  16th,  1912,  num- 

54 


DRIFTING  INTO  SOCIALISM 

her  of  the  Outlook,  Mr.  Frank  Trumbull, 
chairman  of  the  Boards  of  Directors  of 
the  Chesapeake  &  Ohio  and  M.  K.  &  T. 
Railroads,  said, 

"We  must  not  forget  that  every 
step  along  the  road  of  regulation  of 
business  is  a  step  in  the  direction  of 
State  Socialism.  Unless  we  have  de- 
termined that  end  to  be  desirable  it 
behooves  us  to  weigh  carefully  each 
proposal  to  move  further  toward  it. 
Otherwise  we  may  thoughtlessly  gain 
such  headway  that  we  cannot  apply 
the  brakes/' 

If  we  are  drifting  into  Socialism  the 
change  will  come  without  revolution  or 
perceptible  upheaval.  It  will  be  the  nat- 
ural development  of  tendencies  already 
fully  established. 

There  is  no  logical  stopping  point  for  a 
policy  of  regulation  once  it  has  been  en- 
tered upon.  For  partial  regulation  is  sim- 
ply legislation  for  the  benefit  of  certain 

55 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

parts  of  the  people  to  the  exclusion  of  the 
others. 

And  once  the  precedent  is  established, 
those  previously  excluded  will  demand  ad- 
ditional regulation  in  their  own  behalf. 
And  their  demands  will  have  to  be  met. 

Something  like  this  has  already  hap- 
pened. The  first  example  of  the  policy  of 
government  regulation  was  the  protective 
tariff. 

This  was  regulation  for  the  benefit  of  a 
certain  class  of  capitalists  or  investors.  In 
the  years  that  followed,  labor  organized 
into  unions  and  federations,  and  has  now 
become  an  important  factor  in  politics. 
So  that  the  policy  of  regulation  is  now  be- 
ing applied  to  benefit  this  other  class. 

It  is  the  irony  of  fate  that  a  policy  first 
employed  to  give  a  special  privilege  to  a 
certain  class  should  later  be  applied  so  as 
to  work  this  same  class  a  special  injury. 

Socialism  is  still  a  theory.  It  has  never 
been  tried  under  conditions  similar  to 
those  of  the  present  day.  In  its  evolution 

56 


DOCTRINES  TO  BE  MODIFIED 

some  of  its  old  doctrines  are  certain  to  be 
modified. 

In  the  light  of  present  development  it  is 
likely  that  one  of  these  will  be  the  doctrine 
of  government  ownership. 

For  the  purposes  of  Socialism  can  be 
accomplished  equally  as  well  and  much 
more  easily  simply  by  extending  the  policy 
of  government  regulation  so  that  the  gov- 
ernment will  control  prices,  wages  and 
other  conditions  in  all  lines  of  human 
activity. 

We  have  seen  a  modification  analogous 
to  this  take  place  in  the  single-tax  move- 
ment. Henry  George,  the  father  of  the 
single  tax  idea,  proposed  that  the  govern- 
ment actually  confiscate  all  land  in  order 
that  it  might  take  for  itself  the  benefit  of 
the  unearned  increment. 

But  his  followers  have  discovered  that 
the  same  result  can  be  attained  by  simply 
taxing  away  the  unearned  increment  and 
leaving  the  present  system  of  land  titles 
alone.  So  the  single  taxers  of  the  present 

57  » 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

expressly  disavow  an  intention  to  confis- 
cate the  land. 

Such  a  revolutionary  measure  is  no 
more  necessary  for  them  than  government 
ownership  is  for  the  Socialists. 

We  believe  that  the  tendencies  of  the 
whole  country  are  strongly  socialistic.  A 
majority  of  the  American  people  certainly 
believe  that  the  solutions  of  many  of  our 
economic  and  industrial  problems  are  to 
be  found  in  some  form  of  government  reg- 
ulation. 

A  large  proportion  of  these  people  are 
horrified  at  the  mere  thought  of  Socialism, 
but  their  ideas  are  socialistic  nevertheless. 

We  do  not  believe  that  Socialism  will  be 
ushered  in  by  revolution  or  that  its  coming 
will  necessarily  mean  calamity  for  the 
United  States.  No  one's  opinion  as  to 
whether  it  is  a  good  thing  for  the  country 
or  not  is  of  much  value  until  it  has  been 
tried. 

We  are  certain,  however,  that  the  drift 
is  strongly  in  that  direction,  and  we  believe 

58 


POLICY  AFFECTS  CERTAIN  INVESTMENTS 

that  we  should  look  the  situation  squarely 
in  the  face. 

As  Socialism  is  simply  an  extension  of 
the  idea  of  government  regulation,  it  fol- 
lows that,  as  far  as  the  investor  is  con- 
cerned, what  has  already  been  said  about 
the  effect  of  this  policy  on  investments 
based  on  our  railroads,  public  utilities  and 
other  great  industries  will  apply  with 
equal  or  greater  force  here. 

Government  regulation,  to  whatever  in- 
dustry or  business  it  is  applied,  zvill  always 
result,  first,  in  a  reduction  of  profits;  and, 
second,  in  a  depreciation  of  the  securities 
based  on  the  industry  affected. 

It  is  true  that  this  may  be  remedied  by 
additional  legislation  or  regulation  to  pro- 
tect the  investor,  but  there  is  no  indication 
of  any  such  measure  being  taken  at  the 
present  time. 

Socialism  is  stronger  in  England  than 
anywhere  else  in  the  world.  Compara- 
tively speaking,  the  movement  in  this 
country  is  still  in  its  infancy,  but  there  can 

59 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

be  no  doubt  that  we  are  strongly  inclined 
to  follow  England,  though  we  are  still  far 
in  her  rear. 

It  is  claimed  that  Socialism  in  England 
has  already  had  the  effect  of  impairing  in 
some  degree  the  credit  of  the  country. 
We  quote  from  an  article  by  Charles  John- 
ston in  a  recent  number  of  the  North 
American  Review: 

"The  mention  of  England  brings 
me  inevitably  to  the  plans  of  Mr. 
Lloyd  George,  which  have  already 
made  such  revolutionary  progress 
there.  It  is  not  my  purpose  here  to 
discuss  whether  those  reforms  do 
more  good  than  harm.  But  I  wish  to 
point  out,  what  is  more  to  the  purpose 
in  the  present  discussion,  that  they 
are  extremely  costly.  Note  the  im- 
paired credit  of  England,  as  evidenced 
by  the  relentless  fall  of  Consolidated 
,  Government  Stock,  the  so-called  Con- 
sols. Far  above  par  before  the  South 
African  War ;  now  down  in  the  seven- 

60 


THESE  REFORMS  COSTLY 

ties  and  still  falling.  Note  also  the 
increasing  difficulty  of  the  struggle 
to  keep  up  the  battleship  strength  of 
the  nation,  in  the  face  of  Germany's 
naval  programme.  These  are  signs 
of  the  times,  that  all  may  read. 

"That  socialistic  plans  like  those  of 
Mr.  Lloyd  George  must  of  necessity 
be  costly,  in  the  long  run  ruinously 
costly,  is  almost  a  logical  necessity. 
For  look  what  they  amount  to,  in 
principle;  to  give  to  the  less  effective 
the  same  reward  as  to  the  more  effec- 
tive, or,  to  speak  in  Darwinian  terms, 
to  suspend  the  struggle  for  existence 
and  the  survival  of  the  fittest. 

"An  immense  increase  in  cost,  that 
is  inevitable.  And  if  the  principle 
were  made  the  basis  of  government, 
in  other  words,  if  the  Socialist  party 
were  to  win  at  the  polls,  and  carry 
through  their  programme,  it  would 
mean  an  enormously  costly  govern- 

61 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

ment,    with    increasing    burdens    of 
taxation." 

It  is  our  opinion  that  socialistic  legisla- 
tion has  not  been  the  only  cause,  or  per- 
haps not  even  the  main  one,  to  which 
might  be  attributed  the  fall  in  Consols.  It 
is  plain,  however,  that  such  legislation  as 
that  providing  for  old-age  pensions  or 
employment  insurance  is  bound  to  be  a 
great  financial  burden  for  any  govern- 
ment. And  if  this  tendency  were  carried 
far  enough  it  would  certainly  impair  the 
country's  credit  and  result  ultimately  in  a 
depreciation  of  its  bonds. 

And  U.  S.  Government  bonds  might  be 
affected  in  this  way  as  well  as  British 
Consols. 


62 


CHAPTER  VI. 

The  Single  Tax — Modified  in  Practice — 
Effect  on  Railroads — Public  Utilities — 
Mortgages — Land  Speculation. 


single-tax  movement  is  an- 
other growing  tendency  which 
will  affect  certain  kinds  of  invest- 
ment securities.  Since  the  publication  of 
Henry  George's  book,  "Progress  and  Pov- 
erty," in  1879,  this  movement  has  grown 
steadily  until  now  it  has  a  body  of  enthu- 
siastic propagandists  in  almost  every  civ- 
ilized country  on  the  globe. 

In  England,  Germany,  Australia,  New 
Zealand  and  Canada  the  single-tax  move- 
ment is  especially  strong,  while  in  the 
United  States  the  number  of  its  adherents 
is  increasing  with  great  rapidity. 

During  1912  Oregon,  California  and 
Missouri  voted  on  constitutional  amend- 

G3 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

ments  which  would  have  made  possible  a 
trial  of  the  single-tax  idea  in  those  States. 
And  Ohio  gave  much  attention  to  the  sub- 
ject in  its  convention  assembled  to  draft  a 
new  constitution. 

The  movement  was  defeated  in  all  of 
these  cases,  but  it  is  likely  that  this  was  no 
more  than  a  temporary  check  and  really 
served  as  a  means  for  gaining  many  new 
converts. 

In  estimating  the  strength  of  this  ten- 
dency it  is  well  to  remember  that  the  single 
tax  or  some  modification  of  it  is  also  a  doc- 
trine of  the  Socialists. 

The  following  is  taken  from  the  1912 
platform  of  the  Socialist  party : 

"The  collective  ownership  of  land 
wherever  practicable,  and  in  some 
cases  where  such  ownership  is  im- 
practicable, the  appropriation  by  tax- 
ation of  the  annual  rental  value  of  all 
land  held  for  speculation  or  exploita- 
tion." 

64 


TRIAL   OF    SINGLE   TAX    CERTAIN 

So  the  single-tax  movement  may  count 
on  the  Socialists  for  support. 

With  the  initiative  in  their  hands  it 
seems  certain  that  sooner  or  later  the  sin- 
gle taxers  will  win  out  in  this  country,  at 
least  sufficiently  to  give  their  theory  a  fair 
trial. 

The  following  definition  of  the  single 
tax  is  a  quotation  from  one  of  Henry 
George's  writings  on  the  subject: 

"I  shall  briefly  state  the  funda- 
mental principles  of  what  we  who 
advocate  it  call  the  single  tax. 

"We  propose  to  abolish  all  taxes 
save  one  single  tax  levied  on  the  value 
of  land,  irrespective  of  the  value  of 
the  improvements  in  or  on  it. 

"What  we  propose  is  not  a  tax  on 
real  estate,  for  real  estate  includes 
improvements.  Nor  is  it  a  tax  on 
land,  for  we  would  not  tax  all  land, 
but  only  land  having  a  value  irre- 
spective of  its  improvements,  and 

65 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

would  tax  that  in  proportion  to  its 
value. 

"Our  plan  involves  the  imposition 
of  no  new  tax,  since  we  already  tax 
land  values  in  taxing  real  estate.  To 
carry  it  out  we  have  only  to  abolish 
all  taxes  save  the  tax  on  real  estate, 
and  to  abolish  all  of  that  which  falls 
on  buildings  or  improvements,  leav- 
ing only  that  part  which  now  falls  on 
the  value  of  the  bare  land,  increasing 
that  so  as  to  take  as  nearly  as  may  be 
the  whole  of  the  economic  rent,  or 
what  is  sometimes  called  the  'un- 
earned increment  of  land  values/ 

"That  the  value  of  the  land  alone 
would  suffice  to  provide  all  needed 
public  revenues — municipal,  county, 
state  and  national — there  is  no  doubt." 

The  idea  is  that  land  values  are  created 
by  the  whole  community  and  that  any  in- 
crease in  the  value  should  go  to  the  com- 
munity rather  than  to  the  individual  land- 

66 


FUNDAMENTAL  SECURITY  UNAFFECTED 

owner.  That  the  value  of  a  business  cor- 
ner is  determined  by  the  number  of  people 
who  walk  past  it. 

The  single  taxers  hold  that  if  the  com- 
munity appropriated  this  value  by  taxa- 
tion all  other  taxes  could  be  abolished. 

It  is  not  within  the  scope  of  this  inquiry 
to  discuss  the  expediency  or  justice  of  this 
theory.  What  we  are  concerned  with  is, 
how  will  it  affect  the  value  of  investment 
securities. 

In  the  first  place,  the  single  tax  would 
mean  the  removal  of  all  taxes  on  personal 
property,  including  the  taxes  on  money, 
bonds,  stocks  and  mortgages. 

This  would  be  a  great  advantage  to  in- 
vestors, at  least  to  those  who  are  in  the 
habit  of  paying  taxes  on  these  forms  of 
property.  But  as  it  would  have  no  effect 
on  the  fundamental  security  on  which  the 
investments  in  which  we  are  interested 
are  based,  we  will  not  discuss  it  further. 

The  experience  of  the  cities  which  have 
tried  the  single  tax  seems  to  indicate  that 

67 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

in  its  practical  application  a  modification 
of  the  original  theory  takes  place.  It  was 
the  idea  of  Henry  George  that  the  State 
should  take  the  entire  "unearned  incre- 
ment" even  though  it  might  be  many  times 
what  would  be  necessary  to  run  the  gov- 
ernment. 

But  at  the  present  time  the  single-tax 
system  has  come  to  mean  simply  the  aboli- 
tion of  all  taxes  except  the  tax  on  land. 
And  instead  of  attempting  to  tax  away  all 
land  value,  only  so  much  is  taken  as  is  nec- 
essary for  the  needs  of  the  government, 
irrespective  of  the  rate  at  which  the  "un- 
earned increment"  may  accumulate. 

Thus  Vancouver,  B.  C.,  adopted  the  sin- 
gle tax  by  gradually  abolishing  all  other 
taxes.  It  was  not  found  necessary  to  in- 
crease the  tax  rate  on  land,  which  remains 
at  22  mills  on  the  dollar — the  same  as  it 
was  before  the  single  tax  was  adopted. 
Between  the  years  1900  and  1909,  however, 
the  value  of  Vancouver  real  property  prac- 
tically quadrupled,  this  "unearned  in- 

68 


A  TAX  ON  VALUE  OF  LAND 

crement"  amounting  to  something  like 
$35,000,000.00. 

This  modification  in  the  application  of 
the  single  tax  has  led  to  some  suggestions 
for  changing  the  name  of  the  movement. 
And  one  often  hears  the  terms  "Scientific 
Taxation"  or  "Natural  Taxation." 

In  our  discussion  of  the  single  tax  we 
will  assume  this  modification. 

The  single  tax  is  a  tax  on  the  value  of 
land.  Whether  it  will  affect  the  value  of 
a  property  or  industry  or  business  or  not 
depends  altogether  on  whether  under  this 
new  system  the  total  amount  of  taxes  to  be 
paid  by  the  property  or  business  or  indus- 
try will  be  increased  or  decreased. 

If  the  total  taxes  are  decreased  the 
property  will  be  benefited;  if  they  are  in- 
creased it  will  be  injured. 

And  as  a  property  is  benefited  or  injured 
the  securities  based  upon  it  will  increase 
or  depreciate  in  value. 

Now,  at  first  glance  it  would  seem  that 
the  railroads,  street  car  lines,  gas  and 

69 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

electric  light  plants,  water  works,  tele- 
phone companies  and  all  other  public  utili- 
ties would  benefit  immensely  by  the  single- 
tax  system.  For  railroads  own  compara- 
tively little  land,  often  no  more  than  their 
rights-of-way  and  terminals,  and  it  would 
seem  that  the  increased  tax  on  these  would 
be  much  more  than  offset  by  the  exemption 
of  rolling  stock,  stations,  track  and  other 
improvements  from  taxation  and  the  re- 
moval of  the  very  burdensome  special  rail- 
road and  corporation  taxes. 

And  this  would  seem  to  be  all  the  more 
true  of  other  public  utilities,  a  telephone 
company,  for  instance,  which  apparently 
owns  no  land  at  all  except  what  is  neces- 
sary for  its  exchange  and  office  buildings. 

But  that  this  is  far  from  the  true  state 
of  affairs  we  will  let  Mr.  Thomas  G. 
Shearman,  a  leading  single  taxer,  demon- 
strate. The  following  is  taken  from  his 
book,  "Natural  Taxation" : 

"It  has  already  been  mentioned  that  the 
professed  defenders  of  farmers  and  other 

70 


CORPORATIONS   BITTERLY   OPPOSED 

owners  of  small  homesteads  oppose  the  con- 
centration of  taxation  upon  ground  rents,  on 
the  plea  that  this  would  exempt  all  fran- 
chises and  monopolies,  including  railways, 
express  companies,  telegraphs,  telephones, 
gasworks,  electric  lighting  works,  oil-pipe 
lines  and  the  like.  If  this  were  the  fact  we 
may  be  sure  that  the  shrewd  managers  of 
such  monopolies,  assisted  as  they  are  by  the 
most  sagacious  and  experienced  advisers  in 
the  country,  would  have  discovered  it  by 
this  time.  We  may  also  be  sure  that  the 
Legislatures  of  two-thirds  of  the  States, 
owned  as  they  are,  body  and  soul,  by  corpo- 
rations of  this  precise  class,  would  hasten  to 
avow  their  aversion  to  the  principle  of  tax- 
ing ground  rents  and  to  embody  it  in  their 
statutes.  The  Senate  of  the  United  States 
would  before  now  have  passed  any  neces- 
sary amendment  to  the  Constitution  by  a 
two-thirds  vote. 

"But  do  we  see  the  slightest  tendency  in 
this  direction?  Is  the  proposal  received 
with  favor  by  the  managers  of  a  single  great 
railway  or  telegraph  or  of  any  great  monop- 
oly? On  the  contrary,  is  it  not  notorious 
that  they  are  unanimously  and  bitterly  op- 
posed to  it  ? 

71 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

"These  gentlemen  are  not  deceived.  They 
know  well  enough  that  their  valuable  fran- 
chises represent  exclusive  rights  to  the  use 
of  land,  and  that  they  neither  have  nor  can 
have  any  exclusive  rights  to  anything  else, 
except  to  patent  rights,  which  are  very 
costly  and  which  only  last  for  a  few  years. 

"Take  one  of  our  great  railway  lines,  for 
example.  Add  up  either  the  market  value 
or  the  cost  of  replacing  its  rails,  equipment, 
building  improvements  and  chattels  of  every 
kind,  whether  movable  or  immovable,  and  at 
a  most  liberal  valuation.  The  total  will  never 
come  to  within  millions  of  its  nominal  debt, 
and  will  never  touch  its  capital  stock.  What 
gives  value  to  the  enormous  amount  of 
stock?  The  exclusive  privilege  of  using  a 
narrow  strip  of  barren  land,  five  hundred,  a 
thousand,  or  two  thousand  miles  long,  un- 
broken by  highways  or  other  rights  over 
land,  whether  public  or  private.  Under  the 
present  system  railway  managers  persuade 
local  assessors  that  this  land  should  be  val- 
ued no  higher  than  the  equally  barren  land 
in  adjoining  farms;  and  the  farmers'  special 
advocates  insist  that  this  is  the  true  basis  of 
valuation.  But  it  is  absurd. 

"The  value  of  all  land  depends  upon  the 

72 


USE  OF  LAND  DETERMINES  ITS  VALUE 

value  of  the  use  which  can  be  made  of  it. 
No  farmer  can  use  his  land  for  the  carriage 
of  goods  or  passengers,  beyond  the  limits  of 
his  own  farm.  If  all  the  farmers  between 
New  York  and  San  Francisco  agreed  to 
build  a  railway,  without  forming  a  railway 
corporation,  they  would  be  compelled  to 
break  their  line  at  every  highway,  to  dis- 
mount their  passengers  and  unload  their 
freight.  Therefore,  nobody  outside  of  a  rail- 
way company  can  use  his  land  for  this  most 
valuable  purpose.  And  this  privilege  of 
using  an  unbroken  strip  of  land,  with  loco- 
motives running  forty  miles  an  hour,  is  all 
which  gives  to  the  stock  of  any  American 
railway  company  its  market  value;  while  it 
generally  covers  from  one-third  to  one-half 
of  its  bonds,  in  addition. 

"The  notion  that  such  privileges  on  land 
are  to  be  appraised  by  the  acre,  like  farm 
lands,  can  be  readily  tested  by  applying  the 
same  principle  to  any  other  land.  In  great 
cities  land  is  often  sold  at  a  price  estimated 
by  the  square  foot.  Some  lots  containing 
2,000  square  feet  are  salable  for  $200,000, 
or  $100  per  foot.  But  if  a  single  foot  of 
this  land  were  sold  by  itself,  with  the  knowl- 
edge that  no  more  could  be  had,  who  would 

73 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

give  even  a  dollar  for  it,  except  as  a  means 
of  blackmailing  the  owner  of  the  rest? 
Just  so,  the  value  of  a  strip  of  land  un- 
broken for  a  thousand  miles,  for  use  as  a 
railway,  is  something  immense ;  while  the 
same  land  cut  up  in  a  thousand  sections, 
never  to  be  united,  would  be  almost  value- 
less. For  purposes  of  transportation  it 
would  have  no  value  whatever. 

"Again,  the  value  of  land  depends  upon 
the  variety  of  uses  to  which  it  may  lawfully 
be  put.  Steam  railways,  although  very  use- 
ful, are  to  some  extent  a  nuisance.  The  gov- 
ernment cannot  permit  them  to  be  operated 
upon  every  tract  of  land.  Consequently  land 
owned  by  individuals  is  generally  restricted 
to  other  uses ;  and  it  is,  therefore,  worth  less 
than  land  owned  by  railway  companies. 

"The  franchise  of  a  telegraph  company  is 
of  the  same  nature.  It  is  absolutely  nothing 
but  an  exclusive  privilege  to  extend  its  wires 
over  land.  But  this  is  a  privilege  of  enor- 
mous value.  The  founders  of  the  Western 
Union  Telegraph  Company  have  managed 
to  sell  this  privilege  to  investors  in  its  stock, 
for  at  least  $50,000,000. 

"The  franchises  of  gas  companies,  electric 
light  companies,  steam  heating  companies, 

74 


ENORMOUS  VALUES  UNTAXED 

waterworks  and  the  like,  consist  so  obviously 
of  mere  privileges  to  use  unimproved  land 
as  to  need  no  explanation.  Street  railroads, 
also,  so  palpably  own  no  privileges  other 
than  the  mere  right  to  run  over  land,  that  it 
seems  almost  an  insult  to  the  understanding 
of  any  reader  to  explain  the  case.  None  of 
these  corporations  have  any  other  franchises 
than  these  rights  over  land. 

"Under  the  present  system,  in  most  cases, 
all  these  enormous  values  go  untaxed.  The 
law  of  New  York  distinctly  exempts  fran- 
chises from  taxation ;  although  it  is  well 
settled  that  they  would  be  taxable  as  land 
except  for  this  legislative  interference.  Un- 
der the  system  here  proposed  all  these  values 
would  be  fairly  taxed." 

That  the  taxes  of  the  railroads  and  other 
public  utilities  under  the  single-tax  system 
would  be  enormously  increased  is,  there- 
fore, clear.  And  an  increase  of  taxes  like 
any  other  expense  would  mean  a  reduction 
of  profits. 

And  a  reduction  of  profits  in  any  indus- 
try inevitably  operates  to  decrease  the 
margin  of  safety  of  investments  based 

75 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

upon  that  industry  and  to  depreciate  their 
value. 

However  great  a  good  the  single-tax 
system  might  be  for  humanity  as  a  whole 
— and  indeed  with  those  who  urge  this 
reform  it  is  raised  almost  to  the  dignity  of 
a  religion,  for  they  believe  it  will  abolish 
poverty,  stimulate  industry  and  cure  all 
our  troublesome  economic  ills  for  all  time 
to  come — it  will  certainly  injure  the  bonds 
and  stocks  based  on  the  industries  men- 
tioned in  a  permanent  and  lasting  way. 

It  is  not  so  clear  as  to  how  the  single 
tax  would  affect  the  average  industrial 
bonds  and  stocks.  This  would  depend  on 
the  proportion  of  land  to  other  property 
owned  by  the  industry  in  question.  One 
with  large  land  holdings,  a  coal  mining 
company,  for  instance,  would  probably 
have  to  pay  more  taxes  and  would  be  in- 
jured thereby,  while  one  with  propor- 
tionately small  land  holdings,  such  as  a 
clothing  factory,  would  have  to  pay  less 
taxes  and  would  reap  a  benefit. 

76 


STILL    IN    EXPERIMENTAL    STAGE 

It  is  likely  that  this  latter  would  result 
in  the  majority  of  cases  and  the  securities 
based  on  such  industries  would  gain  in 
value. 

The  single  tax,  like  Socialism,  is  still  in 
the  experimental  stage.  It  has  not  been 
tried  on  any  scale  large  enough  to  prove 
or  disprove  its  merits  or  to  make  it  possi- 
ble to  state  exactly  what  its  entire  effect 
will  be. 

We  must  form  our  judgments  in  large 
measure  by  the  arguments  for  and  against 
it  made  by  the  single  taxers  and  those  who 
oppose  them. 

There  is  some  question  in  our  mind  as 
to  whether  the  adoption  of  the  single  tax 
would  operate  to  injure  city,  county,  state, 
district  or  other  tax-secured  bonds.  If 
this  system  curtailed  the  power  of  a  com- 
munity to  raise  as  much  money  as  neces- 
sary for  its  needs  by  taxation,  certainly 
the  bonds  of  such  a  community  would  be 
injured  thereby. 

This  situation  might  arise  in  a  com- 

77 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

munity  where  land  values  were  at  a  stand- 
still or  on  the  decline.  In  such  a  case 
there  would  be  no  "unearned  increment" 
for  the  community  to  appropriate. 

The  single  taxers  hold  that  there  is  no 
danger  from  this  source.  But,  on  the 
other  hand,  during  the  recent  election  in 
California,  in  which  a  vote  was  taken  on  a 
single-tax  amendment  to  the  Constitution, 
the  Anti-Single  Tax  League  of  California 
contended  that  "This  amendment,  if  car- 
ried, will  so  affect  the  integrity  of  our  tax 
system  that  it  would  make  municipal  bonds 
unsalable  and  seriously  harm  the  credit  of 
the  entire  State" 

This  statement  was  made  over  the 
names  of  the  Los  Angeles  Chamber  of 
Commerce,  the  San  Francisco  Chamber 
of  Commerce,  the  City  Club  of  Los  An- 
geles, the  California  State  Realty  Federa- 
tion, the  California  State  Grange,  the 
Civic  League  and  Improvement  Clubs  of 
San  Francisco,  the  Los  Angeles  Realty 
Board,  Prof.  Carl  C.  Plehn  of  the  Depart- 

78 


EFFECT  ON   MORTGAGE  INVESTMENTS 

ment  of  Economics  of  the  University  of 
California,  and  many  other  organizations 
and  prominent  individuals. 

It  is  obvious  that  such  a  radical  change 
in  the  system  of  taxation  would  be  at- 
tended with  a  certain  amount  of  danger  to 
the  holder  of  tax-secured  bonds.  But  it  is 
impossible  to  say  how  great  this  danger 
would  be  or  whether  an  injury  to  a  com- 
munity's credit  resulting  from  such  a 
change  would  necessarily  be  permanent 
or  not. 

The  effect  of  the  single  tax  on  mortgage 
investments  can  be  ascertained  with  some- 
what greater  definiteness. 

In  the  case  of  mortgages  on  unimproved 
land,  whether  city  lots  or  farm  property, 
it  is  obvious  that  great  injury  would  be 
done. 

For  taxes  on  unimproved  land  would 
be  very  materially  increased.  In  some 
cases  this  would  very  likely  amount  prac- 
tically to  confiscation,  and  all  security  for 

79 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

a  mortgage  based  on  such  land  would  be 
destroyed  absolutely. 

It  is  not  possible  to  make  a  general 
statement  as  to  whether  the  single  tax 
would  increase  or  decrease  the  total  taxes 
on  farms. 

The  single  taxers  make  very  strong 
claims  tending  to  show  that  their  system 
would  be  of  inestimable  benefit  to  the 
farmers.  And,  on  the  other  hand,  the 
farmers  have  been  the  most  consistent 
opponents  of  the  plan,  for  they  believe  it 
would  very  materially  increase  the  burden 
of  taxation  which  they  must  bear. 

The  effect  that  the  single  tax  would 
have  on  the  amount  of  taxes  of  a  particular 
farm  would  depend  on  the  ratio  which  the 
value  of  the  improvements  bore  to  the  total 
value  of  the  farm.  If  the  improvements 
made  up  more  than  half  the  total  value, 
then  the  exemption  of  improvements  from 
taxation  under  the  single  tax  would  more 
than  offset  the  increased  taxes  on  the  bare 

80 


SOME  FARMERS  BENEFITED 

land.  And  the  total  taxes  for  the  farm 
would  be  reduced. 

But  where  the  improvements  constitute 
less  than  half  the  value,  the  taxes  of  the 
whole  farm  would  be  increased. 

In  a  district  of  small,  highly-improved 
farms  and  intensive  methods  of  cultivation 
the  single  tax  would  probably  lighten  tke 
farmers'  burden. 

But  in  a  new  country,  where  farms  are 
larger  than  is  necessary  and  many  farmers 
buy  extra  land  for  the  firewood  that  is  on 
it  or  for  pasture  or  for  speculation  or  just 
because  it  is  cheap,  the  ratio  of  the  value 
of  improvements  to  the  total  value  grows 
smaller.  And  wherever  it  is  less  than  half, 
such  a  farm  would  pay  an  increased 
amount  of  taxes  under  the  single  tax. 

And  where  taxes  grow  heavier,  the  farm 
affected  will  decrease  in  value  and  the 
safety  of  a  mortgage  based  upon  it  will  be 
impaired. 

The  effect  of  the  single  tax  on  improved 
city  property  may  be  ascertained  with 

81 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

greater  accuracy.  First,  because  the  ratio 
of  the  value  of  improvements  to  land  does 
not  vary  so  widely  as  it  does  with  farms. 
And,  second,  because  the  single  tax  has 
already  been  put  into  practice  in  a  few 
cities  and  this  experience  throws  some 
light  on  the  subject. 

Almost  invariably  in  the  cities  the  im- 
provements are  worth  more  than  the  bare 
land  on  which  they  rest.  You  will  find  a 
$2,000  cottage  on  a  $1,000  lot  and  a 
$10,000  house  on  a  $5,000  lot.  Generally 
the  improvements  are  worth  from  two- 
thirds  to  three-fourths  of  the  total  value. 

And  this  is  especially  true  of  residence 
property.  From  the  cheapest  up  to  the 
costliest,  practically  the  same  ratio  holds. 

It  follows  that  in  the  majority  of  cases 
improved  city  property  will  pay  less  taxes 
under  the  single-tax  system,  and  mort- 
gages based  on  such  property  instead  of 
being  injured  will  be  afforded  a  greater 
margin  of  security. 

This  has  been  the  experience  in  Van- 

82 


AIMS  AT  LAND  SPECULATION 

couver  and  Edmonton,  two  Canadian  cities 
which  have  adopted  the  single  tax. 

There  is  another  kind  of  investment,  or 
rather  speculation,  which  is  more  likely  to 
be  affected  seriously  by  the  single  tax  than 
any  other,  and  that  is  the  buying  of  acre- 
age or  city  lots  in  a  new  community  with 
a  view  to  taking  the  profit  from  the 
increase  in  land  values  as  the  country 
grows  up. 

There  is  a  great  land  boom  now  going 
on  all  along  the  Pacific  coast,  but  especially 
in  the  Northwest  and  in  the  Western  part 
of  Canada. 

Settlers  are  pouring  in  and  new  towns 
are  springing  up,  some  of  which  are  cer- 
tain to  be  great  cities  before  many  years 
have  passed.  For  the  country  is  rich  in 
natural  resources  and  has  great  agricul- 
tural and  commercial  possibilities. 

And  the  land  agent  is  busy.  The  maga- 
zines are  filled  with  his  alluring  advertise- 
ments and  the  mail  heavy  with  his  "litera- 
ture." The  temptation  is  strong  either  to 

83 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

pull  up  stakes  and  emigrate  to  the  new 
country  or  to  buy  a  little  raw  acreage  or 
town  lots  as  a  speculation. 

But  those  who  are  tempted  to  invest 
their  capital  in  this  latter  way  should  bear 
in  mind  the  fact  that  Canada  and  our 
Northwest  are  the  very  strongholds  of  the 
single-tax  movement.  Already  some  cities 
there  have  adopted  the  system  with  great 
success.  And  the  movement  is  likely  to 
spread  rapidly. 

The  single  tax  is  aimed  directly  at  the 
land  speculator.  It  proposes  to  take  away 
from  him  the  increase  in  land  values  due 
to  the  growth  of  the  community. 

In  a  new  country,  where  many  of  the 
landowners  are  absentees  who  have 
bought  land  or  lots  as  a  speculation,  the 
temptation  is  especially  strong  to  adopt  the 
single  tax  because  it  will  fall  heaviest  on 
those  who  are  far  away  and  are  adding 
nothing  to  the  prosperity  and  development 
of  the  community. 

In  answer  to  questions  of  the  writer's 

84 


ADVANTAGES  ENUMERATED 

on  the  points  just  discussed,  Daniel  Kiefer, 
chairman  of  the  Joseph  Pels  Fund  Com- 
mission, which  is  the  leading  single-tax 
organization  of  the  country,  stated: 

"1.  The  single  tax  will  decrease 
the  total  taxes  on  average  improved 
city  residence  property. 

"2.  It  will  decrease  the  total  taxes 
on  average  improved  city  business 
property. 

"3.  Decrease  taxes  on  manufactur- 
ing plants. 

"4.  Probably  no  more  than  10%  of 
all  revenue  will  come  from  the  farms, 
so  the  tax  on  average  farms  must  be 
largely  decreased. 

"5.  Railroad  taxes  now  equal  but 
y2  of  1%  of  franchise  value.  Under 
the  single  tax  they  would  pay  very 
much  more. 

"6.  It  will  not  decrease  the  power 
of  a  municipality  to  raise  enough 
revenue  for  all  things  which  muni- 
cipal revenue  is  required." 

85 


CHAPTER  VII. 

Growth  of  Cities — Effect  on  Realty  Values 
— Strengthens  Mortgage  Investments. 

f  •  ^HE  last  census  brought  to  light 
another  tendency  which  is  of 
M  much  importance  to  investors. 
This  is  the  rapid  growth  of  our  cities. 

The  rate  of  growth  of  cities  during  the 
ten  years  from  1900  to  1910  was  more 
rapid  than  during  the  preceding  ten  years. 
And  the  rate  of  growth  of  medium-sized 
cities  was  more  rapid  than  that  of  the 
larger  cities. 

It  appears  that  whereas  cities  which  at 
the  present  time  have  a  population  of 
25,000  or  more  showed  an  increase  of  sub- 
stantially 32*/2  per  cent  between  1890  and 
1900,  these  same  cities  showed  an  increase 
of  a  little  more  than  35  per  cent  between 
1900  and  1910. 

The  proportion  of  the  population  of  the 
United  States  residing  in  cities  of  25,000 

87 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

inhabitants  or  more  was,  in  1880,  17.2  per 
cent;  in  1890,  22.2  per  cent;  in  1900,  26 
per  cent,  and  in  1910  between  31  and  32 
per  cent. 

Rapid  growth  is  not  confined  to  a  few 
cities  or  to  cities  in  any  particular  section 
of  the  country.  As  might  be  expected,  the 
highest  rates  of  growth  have  been  in  cer- 
tain Southern,  Southwestern  and  far 
Western  cities. 

Confining  attention  to  cities  having 
100,000  or  more  inhabitants,  the  most  re- 
markable rates  of  growth  are  as  follows: 

Per  cent  of 

Population        increase 
1910  1000  to  1910 

Birmingham,  Ala 132,685  245.4 

Los  Angeles,  Cal 319,198  211.5 

Seattle,  Wash    237,194  194.0 

Spokane,  Wash 104,404  183.3 

Portland,  Ore 207,214  129.2 

Oakland,  Cal   150,174  124.3 

Atlanta,  Ga 154,839  72.3 

Detroit,   Mich 465,766  63.0 

Other  cities  of  this  class  showing  an  in- 
crease in  excess  of  40  per  cent  were 

88 


PER  CENT  OF  INCREASE 

Bridgeport,  Cleveland,  Columbus,  Denver, 
Kansas  City,  Minneapolis,  Newark  and 
Richmond.  Cities  between  25,000  and 
100,000  inhabitants  which  showed  a  rate 
of  increase  exceeding  100  per  cent  were, 
in  the  order  of  percentage  of  increase, 
Oklahoma  City,  Muskogee,  Okla. ;  Pasa- 
dena, Cal. ;  Berkeley,  Cal. ;  Flint,  Mich. ; 
Fort  Worth,  Tex. ;  Huntington,  W.  Va. ; 
El  Paso,  Tex. ;  Tampa,  Fla. ;  Schenectady, 
N.  Y. ;  San  Diego,  Cal. ;  Tacoma,  Wash. ; 
Dallas,  Tex.;  Wichita,  Kan.;  Waterloo, 
la.,  and  Jacksonville,  Fla. 

The  following  are  the  changes  in  popu- 
lation of  the  eight  largest  cities  of  the 
United  States: 


Population 
1900            1010 

Per  cent  of 
increase 

New  York   .  . 
Chicago 

3,437,202     4,766,883 
1  698  575     2  185  283 

38.7 

28  7 

Philadelphia 

1  203  697     1  549  008 

19  7 

St.    Louis    .  .  , 

,  575  238        687  029 

19  4 

Boston 

560  892        670  585 

19  6 

Cleveland 

381  768        560  663 

46  9 

Baltimore    .  .  , 

508,957        558  485 

9  7 

Pittsburg 

451  512        533  905 

18  2 

89 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

The  rate  of  increase  for  all  cities  of 
more  than  25,000  inhabitants  was  35  per 
cent,  while  the  rate  of  increase  for  the 
country  as  a  whole  during  these  ten  years 
was  only  21  per  cent. 

This  tendency  for  the  cities  to  grow 
faster  than  the  rest  of  the  country  must 
have  its  effect  on  the  business  of  railroads, 
public  utilities  and  productive  industries. 
But  the  relation  is  hardly  close  enough 
and  there  are  so  many  other  factors  enter- 
ing into  the  situation  that  it  is  impossible 
to  draw  any  definite  conclusions  as  to  just 
what  this  effect  is. 

The  rapid  growth  of  urban  population, 
however,  has  a  very  direct  bearing  on  the 
values  of  city  real  estate. 

Between  the  years  1900  and  1910,  for 
example,  while  the  population  of  St.  Louis 
was  increasing  19.4  per  cent,  the  value  of 
its  city  real  estate  increased  over  50  per 
cent. 

St.  Louis  is  a  mature  city.  There  is 
nothing  erratic  or  excited  or  "boomy" 

90 


ST.  LOUIS'  GROWTH  NORMAL 

about  its  growth.  It  has  certain  natural 
advantages  in  location  and  resources 
which  cause  it  to  grow.  This  growth  is 
absolutely  normal.  And  real  estate  values 
have  grown  more  than  twice  as  fast  as 
population. 

In  the  cities  of  most  rapid  growth,  like 
Los  Angeles,  Atlanta,  Detroit  and  Kansas 
City,  the  increase  in  realty  values  during 
the  ten  years  was  almost  unbelievable. 

Los  Angeles  real  estate  increased  in 
value  almost  500  per  cent;  Atlanta  over 
100  per  cent;  Detroit  75  per  cent,  and 
Kansas  City  over  100  per  cent. 

It  is  not  possible  to  formulate  any  gen- 
eral rule  concerning  the  relations  between 
the  growth  of  city  population  and  real  es- 
tate values,  but  it  is  evident  that  the  rela- 
tion is  a  very  close  one  and  that  in  many 
cases  realty  values  will  grow  more  rapidly 
than  population. 

Real  estate  mortgages  are  the  invest- 
ments most  affected  by  this  condition,  and 
the  effect  is  a  most  important  one. 

91 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

The  tendency  of  the  cities  to  grow  at  a 
more  rapid  rate  than  the  rest  of  the  coun- 
try, together  with  the  fact  that  city  real 
estate  increases  in  value  even  more  rap- 
idly than  population,  makes  such  real 
estate  the  safest  basis  for  mortgage  in- 
vestments. 

It  is  superior  to  farm  property  because 
it  increases  more  rapidly  and  more  cer- 
tainly in  value. 

And  it  is  superior. to  industrial  property 
because  its  increase  in  value  is  due  to  a 
.widespread  and  fundamental  sociological 
tendency,  rather  than  to  local  or  tempo- 
rary conditions.  Any  property — farm, 
manufacturing  or  transportation — may 
increase  in  value,  and  any  property  into 
which  the  investor  puts  his  money  should 
show  promise  of  doing  so.  But  there  is  no 
class  of  property  where  the  increase  in 
values  is  so  certain  or  so  little  likely  to  be 
affected  by  adverse  conditions,  such  as  leg- 
islation or  politics,  as  city  real  estate. 


92 


CHAPTER  VIII. 

New. Standards — Mrs.  Harriman's  Invest- 
ments— Stock  Exchange  Regulation — 
Effect  on  Listed  Securities — The  Safest 
Type  of  Investment — Back  to  the  Land. 

WE  have  now  examined  the  four 
main   tendencies   of   the   times 
which   bear   directly  upon   the 
fundamental    security    of    the    different 
classes  of  investments. 

The  most  important  and  far-reaching 
of  these  tendencies  is  the  extension  of  the 
policy  of  government  regulation.  The  ap- 
plication of  this  policy  has  a  very  intimate 
relation  to  the  value  of  all  railroad,  public 
utility  and  industrial  bonds  and  stocks. 
For  it  must  inevitably  reduce  the  profits  of 
these  businesses  and  in  turn  depreciate  the 
value  of  their  securities. 

Some  form  of  Socialism  is  the  logical 

93 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

development  of  this  policy,  and  the  differ- 
ence in  its  effect  upon  investments  from 
that  of  government  regulation  would  be 
one  of  degree  only. 

The  single-tax  tendency  is  compara- 
tively of  minor  importance,  for  it  is  still  in 
its  infancy.  But  all  signs  point  to  a  time 
when  the  experiment  will  be  made  in  this 
country  and  it  behooves  the  investor  to  un- 
derstand thoroughly  just  what  its  effect  on 
investments  would  be.  Unquestionably  it 
would  be  of  great  damage  to  railroad  and 
public  utility  bonds  and  stocks,  to  mort- 
gages based  upon  unimproved  land  and  to 
the  securities  of  industries  using  a  great 
amount  of  land,  such  as  mining  and  lum- 
ber enterprises. 

The  effect  of  the  single  tax  on  farm 
mortgages  would  depend  on  whether  the 
farms  in  question  were  highly  improved 
or  not. 

And  its  effect  on  mortgages  based  upon 
improved  city  property  would,  as  a  rule, 
be  beneficial. 

94 


CITY  PROPERTY  MORE  VALUABLE 

Industries  not  using  much  land,  such  as 
most  manufactures,  would  be  benefited. 
For  their  taxes  would  be  reduced. 

And  investors  as  a  class  would  be  bene- 
fited through  the  exemption  of  stocks, 
bonds,  and  mortgages  from  taxation. 

The  tendency  for  our  cities  to  increase 
at  a  faster  rate  than  the  population  as  a 
whole  has  a  very  direct  effect  upon  the 
safety  of  city  mortgages.  For  it  insures 
that  city  property  will  generally  increase  in 
value  and  at  a  faster  rate  than  farm  or  raw 
lands. 

These  are  by  no  means  the  only  tenden- 
cies which  the  observer  might  discover. 
Burso  far  as  investors  are  concerned  they 
are  the  main  ones,  and  in  every  case  they 
have  attained  such  strength  that  a  consid- 
eration of  their  various  effects  is  no 
longer  a  matter  of  mere  guesswork,  but  of 
dealing  in  perfectly  obvious  facts. 

An  examination  of  these  facts  indicates 
that  many  of  our  old  investment  standards 
are  sadly  in  need  of  revision. 

95 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

It  explains  the  report  that  in  the  few 
years  since  Mr.  E.  H.  Harriman's  death 
his  widow  has  disposed  entirely  of  his  vast 
holdings  of  railroad  bonds  and  stocks. 
And  that  recently  one  of  the  high  officials 
of  the  Southern  Pacific,  a  man  of  consid- 
erable wealth,  stated,  publicly,  that  he  had 
not  a  penny  invested  in  railroad  securities. 

The  bonds  and  stocks  of  our  great  rail- 
roads, public  utilities  and  industries  are 
usually  listed  on  the  New  York  Stock  Ex- 
change. This  is  of  inestimable  benefit  to 
the  investor.  For  at  all  times  and  under 
all  conditions  the  New  York  Stock  Ex- 
change affords  an  instantaneous  market 
for  the  securities  listed  there. 

This  market  has  as  many  phases  as  the 
weather.  And  is  as  uncertain.  It  is  in- 
fluenced by  many  conditions  which  bear 
no  relation  whatever  to  fundamental 
values.  The  market  price  of  a  listed  secur- 
ity may  in  no  way  indicate  its  true  worth. 

Yet  the  importance  of  instantaneous 
marketability  is  so  great  with  many  kinds 

96 


STOCK  EXCHANGE  REGULATION  COMING 

of  investors  as  to  far  outweigh  these  obvi- 
ous disadvantages.  Safety  dictates,  for 
example,  that  banks  shall  keep  a  large  part 
of  their  funds  invested  in  securities  which 
can  be  quickly  converted  into  cash,  and 
bonds  listed  on  the  New  York  Stock  Ex- 
change fulfill  this  requirement  better  than 
any  other  kind  of  investment. 

The  policy  of  government  regulation, 
however,  is  operating  to  modify  this  condi- 
tion in  a  very  material  way.  First,  be- 
cause it  is  being  directed  against  just  the 
classes  of  industries  whose  securities  are 
most  likely  to  be  listed  on  the  New  York 
Exchange.  And  is  greatly  impairing  the 
safety  of  these  securities. 

And,  second,  because  the  Exchange 
itself  is  pretty  sure  to  come  in  for  its  share 
of  "regulation"  before  many  years  have 
passed.  The  Congressional  investigation 
of  the  "Money  Trust"  and  the  hyphenated 
bunkum  of  Mr.  T.  W.  Lawson,  entitled 
the  "Remedy,"  in  Everybody's  Magazine, 
are  the  current  indications  of  this. 

97 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

The  Stock  Exchange  represents  Wall 
Street,  and  there  is  a  great  popular  demand 
for  legislation  directed  against  Wall 
Street  which  must  soon  be  met.  For  Wall 
Street  is  our  modern  devil. 

As  William  Graham  Sumner,  the  econ- 
omist, says :  "  'Wall  Street'  takes  the 
place  which  used  to  be  assigned  to  the 
devil.  What  is  that  'Wall  Street'  which 
is  currently  spoken  of  by  editors  and  pub- 
lic men  as  thinking,  wanting,  working  for 
certain  things?  There  is  a  collective  in- 
terest which  is  so  designated,  which  is 
real,  but  the  popular  notion  under  'Wall 
Street'  is  unanalyzed.  It  is  a  phantasm  or 
myth." 

The  indications  are  that  the  popular 
prejudice  against  the  devil,  "Wall  Street," 
will  in  the  end  be  satisfied  by  some  restric- 
tive legislation  directed  against  the  New 
York  Stock  Exchange. 

Mr.  Lawson's  contribution  stands  as  a 
colossal  example  of  faulty  reasoning,  bad 
writing  and  monumental  self-assurance. 

98 


LAWSON  CREATING  SENTIMENT 

Yet  it  is  a  very  close  reflection  of  popular 
ideas. 

Cato,  the  sturdy  old  Roman  senator, 
succeeded  in  stirring  the  Romans  to  action 
against  Carthage  by  adopting  as  his 
slogan,  "Carthago  est  delenda"— Car- 
thage must  be  destroyed — and  impressing 
it  upon  the  minds  of  the  people  at  every 
occasion. 

Lawson  has  chosen  a  "Carthago  est 
delenda"  in  his  phrase,  "the  Stock  Ex- 
change must  be  closed." 

He  attributes  the  high  cost  of  living  and 
all  our  other  economic  ills  to  Stock  Ex- 
change gambling. 

His  explanation  of  the  high  cost  of  liv- 
ing is  very  simple  and  easy  to  understand. 
It  amounts  to  this,  that  the  great  corpora- 
tions of  the  country  that  supply  us  the 
necessities  of  life  through  unbridled  stock 
watering  have  increased  their  capitaliza- 
tions to  such  an  extent  that  they  have 
found  it  necessary  to  charge  double  or 
triple  prices  for  their  products  in  order  to 

99 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

pay  satisfactory  dividends  to  their  stock- 
holders. 

Thus,  if  fifty  per  cent  of  the  stock  of  the 
Steel  Corporation  is  water  then  steel 
prices  must  be  twice  as  high  as  they  would 
be  if  there  were  no  water.  For  twice  as 
much  must  be  paid  to  the  stockholders  in 
dividends. 

Supply  and  demand,  the  currency  and 
the  tariff,  are  no  longer  factors  in  the  sit- 
uation. 

Now  that  Mr.  Lawson  has  let  the  "Sys- 
tem's" cat  out  of  the  bag  we  may,  no 
doubt,  expect  further  rapid  rises  in  prices. 
For  soon  everybody  will  be  "doin'  it." 

The  outlook  for  the  salaried  man  would 
certainly  be  discouraging,  but  happily  a 
remedy  suggests  itself  by  which  he  can 
raise  his  salary  at  will  and  thus  keep 
abreast  of  the  times.  Let  him  incorporate. 

Jones,    the    $l,000-a-year    bookkeeper, 
may  form  the  Jones  Bookkeeping  Com- 
pany.   With  a  capital  of  $20,000  his  pres- 
ent salary  will  pay  5  per  cent  dividends. 
100 


CORRECTING  MISTAKES  NECESSARY 

To  double  his  salary  all  he  need  do  is 
to  reorganize  with  a  capital  of  $40,000.  It 
is  obvious  that  in  order  to  keep  on  paying 
5  per  cent  dividends  he  will  simply  have 
to  draw  a  salary  of  $2,000  a  year  instead 
of  $1,000. 

This  flapdoodle  is  an  excellent  example 
of  a  tendency  to  superficiality,  which  has 
become  almost  a  national  characteristic. 
Instead  of  searching  rigorously  for  the 
causes  of  whatever  economic  ills  we  are 
subject  to,  instead  of  digging  to  the  very 
bottom  of  our  currency  and  taxation  ques- 
tions, for  example,  we  are  coming  to  be- 
lieve that  we  can  benefit  ourselves  more  by 
injuring  those  who  have  profited  by  our 
mistakes  than  we  can  by  correcting  the 
mistakes  themselves. 

"Stop  thief"  is  ever  on  the  tips  of  our 
tongues.  The  man  who  is  more  fortunate 
or  more  industrious  or  more  thrifty  or 
more  far-sighted  than  ourselves  we  are 
prone  to  call  "Robber,"  and  to  seek  to  de- 
prive him  of  what  he  has  accumulated  by 

101 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

passing  laws  which  ultimately  will  only 
operate  to  deprive  us  of  what  we,  our- 
selves, may  save. 

Like  the  doctor  who  dopes  his  patient 
with  morphine,  or  asperin,  or  bromides  to 
stop  the  pain  and  goes  no  farther  toward 
eradicating  the  real  cause  of  the  pain,  we 
are  doping  our  social  system  with  laws 
which,  though  they  may  afford  temporary 
relief,  will  only  result  in  the  end  in  under- 
mining the  very  foundations  of  the  struc- 
ture itself. 

There  probably  has  never  been  a  period 
in  all  history  when  it  was  easier  for  the 
individual,  be  he  laborer  or  banker,  doctor 
or  mechanic,  through  ordinary  industry 
and  thrift  to  live  comfortably,  raise  a  fam- 
ily and  accumulate  a  competency  than  it  is 
right  here  and  now  in  ipij  in  the  United 
States  of  America. 

But  legislation  is  not  now  and  never  can 
be  a  substitute  for  industry  and  thrift,  and 
no  amount  of  bunkum  will  make  a  states- 
man. 

102 


MUCH  LEGISLATION  PREPARED 

Every  investor  should  take  to  heart  this 
example  of  our  eagerness  for  legislative 
dope,  which  has  no  relation  to  the  real 
cause  of  our  troubles,  and  he  should  take 
steps  to  place  his  investments  beyond  the 
power  of  the  quacks  who  prescribe  it. 

Already  much  legislation  along  the  lines 
proposed  by  Mr.  Lawson  has  been  pre- 
pared for  the  Federal  and  State  govern- 
ments to  consider  and  a  good  part  of  it 
will  likely  be  enacted  into  law. 

What  effect  will  this  have  upon  the 
functions  of  the  Stock  Exchange? 

There  is  no  question  but  what  a  large 
part  of  the  business  of  the  Exchange  is  in 
the  nature  of  gambling.  Mr.  Lawson 
makes  the  statement  that  "the  legitimate 
business  transacted  by  the  Stock  Exchange 
is  infinitesimal  compared  with  its  gambling 
business." 

It  is  just  this  speculative  element,  how- 
ever, that  makes  it  possible  for  the  Ex- 
change to  perform  so  perfectly  its  function 

103 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

of  providing  at  all  times  an  instantaneous 
market. 

No  matter  how  tight  money  becomes  or 
how  shaken  the  public  confidence,  the  New 
York  Stock  Exchange  is  always  able  to 
produce  a  buyer  at  some  price  for  what- 
ever securities  are  offered  for  sale  there. 
This  is  because  someone  is  always  willing 
to  take  a  chance. 

But  if  all  gambling  or  speculation  were 
eliminated,  the  business  of  the  Exchange 
would  be  cut  down  to  an  "infinitesimal'' 
part  of  what  it  now  is  under  natural  condi- 
tions, and  its  efficiency  in  providing  an  in- 
stantaneous market  would  be  impaired  to 
the  same  extent.  Mr.  Lawson's  "Rem- 
edy" may  be  a  sure  specific  for  all  our  trou- 
bles, but  it  will  injure  investors  in  this 
way. 

.  It  follows  therefore  that  the  present-day 
investor  should  contract  his  holdings  of 
securities  listed  on  the  New  York  Stock 
Exchange  to  the  narrowest  possible  limits. 
For  the  safety  of  these  securities  is  being 

104 


REAL  ESTATE  MORTGAGES  SAFEST 

impaired  and  their  marketability  is  likely 
to  be  restricted  also. 

This  applies  especially  to  railroad  and 
public  utility  bonds  and  in  a  lesser  degree 
to  industrial  bonds. 

Securities  belonging  to  any  of  these 
classes  and  not  listed  on  the  New  York 
Stock  Exchange  should  be  avoided,  for 
such  securities  while  being  depreciated  in 
the  same  way  as  the  listed  ones  by  rate  re- 
ductions and  other  regulation  do  not  com- 
mand a  ready  market  and  hence  give  the 
investor  very  little  chance  of  escape  once 
he  finds  himself  in  wrong. 

The  class  of  investments  which  seems 
least  likely  to  be  affected  adversely  by  any 
of  the  modern  tendencies  is  real  estate 
mortgages. 

The  powerful  tendency  of  government 
regulation  has  no  application  to  this  class 
of  investments  whatever.  Neither,  appar- 
ently, have  any  of  the  socialistic  tenden- 
cies. 

The  single  tax  would  have  no  material 

105 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

effect  except  upon  mortgages  based  upon 
unimproved  land.  It  probably  would  af- 
fect mortgages  on  a  certain  type  of  farms 
to  a  small  degree  injuriously,  and  as  a 
rule  would  strengthen  mortgages  based  on 
city  property. 

The  main  tendency  affecting  this  class 
of  investments  is  the  constant  growth  of 
our  population.  This  growth  inevitably 
and  unceasingly  increases  the  value  of  all 
real  estate — farm  and  city — and  operates 
to  benefit  and  strengthen  mortgage  invest- 
ments based  on  such  real  estate. 

Of  the  two  types  of  real  estate  mort- 
gages, city  mortgages  receive  a  greater 
benefit  from  the  growth  of  the  population 
than  farm  mortgages,  because  the  rate  of 
growth  of  our  city  populations  is  much 
greater  than  for  farms. 

The  slogan,  "Back  to  the  Land,"  has  as 
much  meaning  for  the  investor  as  for  the 
city  dweller  who  seeks  emancipation  from 
the  drudgery  of  urban  life. 

This  is  a  period  of  economic,  political 

106 


BEST  BASIS  FOR  INVESTMENT 

and  industrial  readjustment.  In  the  pro- 
cess we  have  seen  how  the  security  and 
value  of  most  forms  of  investment  are  be- 
ing or  are  about  to  be  affected. 

Of  all  the  bases  for  investment  the  land 
alone  can  be  relied  upon  to  stand  the  shock 
of  changing  conditions  and  to  increase 
constantly  and  certainly  in  value. 


107 


CHAPTER  IX. 

Mortgage  Investments  —  Ours  Compared 
with  the  German  Mortgage  System  — 
Mortgage  Bonds  in  the  United  States. 


F   I    ^HE  original   and  most  familiar 

type  of  the  real  estate  secured  in- 

M       vestment  is  the  straight  or  indi- 

vidual   mortgage.       The    objections     to 

straight    mortgages   as    investments   are 

their  lack  of  convertibility  and  their  incon- 

venience.    There  is  no  market  for  mort- 

gages. 

The  investor  must  hold  them  until  they 
fall  due  or  sometimes  may  sell  them  at  a 
discount.  And  they  come  in  odd  amounts 
and  carry  with  them  the  burden  of  watch- 
ing taxes  and  insurance  renewals. 

Several  plans  or  systems  have  been 
evolved  in  this  country  and  abroad  for  the 
purpose  of  overcoming  these  objections, 
but  during  the  last  century  the  tendency 

109 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

practically  the  world  over  among  civilized 
countries  has  been  toward  the  adoption  of 
the  German  Mortgage  System. 

We  will  here  compare  that  system  with 
the  one  in  general  use  in  the  United  States. 

In  this  country,  if  you  want  to  borrow 
money  on  your  real  estate,  you  go  to  your 
banker  or  mortgage  broker,  or  real  estate 
agent,  and  give  your  mortgage  and  exe- 
cute mortgage  notes  to  the  amount  he  will 
loan,  paying  him,  in  addition,  a  commis- 
sion for  the  negotiation  of  the  loan.  The 
broker,  however,  has  not  taken  the  mort- 
gage for  his  own  investment,  he  is  simply 
a  middleman.  A  third  party — the  investor 
— is  ultimately  the  real  lender.  Having 
the  right  amount  of  idle  savings  he  buys 
from  the  broker,  at  par  and  interest,  your 
mortgage.  The  broker  is  then  out  of  it. 
His  profit  is  represented  by  the  commis- 
sion charged  the  borrower. 

Now  let  us  see  how  this  system  works 
out  for  the  borrower,  and  then  for  the 
lender. 

no 


TIME  TOO  SHORT  TO  PAY  OFF 

As  we  saw  above,  the  middleman  is  mak- 
ing loans  to  sell.  He  must  make  them  in 
the  form  most  attractive  to  investors;  the 
borrower's  needs  are  not  considered. 
This  form  is  more  or  less  standardized. 
It  generally  means  a  straight  loan  of  three 
or  five  years,  without  privileges  of  pay- 
ment before  maturity,  or  of  reduction  of 
principal  by  periodical  installments. 

Now,  three  or  five  years  is  too  short  a 
time  in  which  to  pay  off  a  real  estate  loan. 
Theoretically,  every  loan,  no  matter  what 
its  character,  should  be  repaid  from  the 
accomplishment  of  the  purpose  for  which 
it  was  made.  A  loan  to  a  farmer  to  help 
him  buy  a  farm  should  be  paid  from  the 
crops  raised  on  the  farm.  A  loan  to  a 
householder  to  buy  a  home  should  be  re- 
paid as  the  rent  would  otherwise  be  paid. 

The  income  from  real  estate  is  slow  and 
three  or  five  years  is  too  short  a  time  for 
doing  this.  The  borrower  meets  his  inter- 
est payments  promptly  enough,  but  at  each 
maturity  of  his  loan  depends  on  a  renewal 

111 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

to  take  care  of  the  principal.  Every  re- 
newal means  a  new  commission  and  some- 
times rates  are  high  and  money  tight  and 
a  foreclosure  hangs  over  his  head.  Then 
we  have  a  touch  of  what  the  French  have 
called  the  "Mortgage  Leprosy/'  We  say 
"have  called,"  because  that  was  a  long 
time  ago.  They  don't  have  it  any  more. 

And  now  about  the  investor.  The 
mortgage  was  made  to  suit  his  needs. 
What  does  he  get?  His  is  a  short  term 
investment,  paying  a  comparatively  high 
rate  of  interest  and  based  on  security 
fundamentally  the  best.  As  an  invest- 
ment, however,  it  is  open  to  several  more 
or  less  serious  objections. 

First  of  all,  mortgages  are  not  converti- 
ble. There  is  no  public  market  for  them 
as  there  is  for  bonds  and  stocks.  To  sell 
a  real  estate  mortgage  generally  means  a 
discount  of  at  least  one  per  cent. 

Then  again,  mortgages  come  in  odd 
amounts,  generally  too  large  for  the  small 
investor  and  often  inconvenient  for  the 

112 


PERSONAL  EQUATION  IN  SALE 

large  one.  An  attempt  has  been  made  by 
some  mortgage  dealers  to  obviate  this  by 
dividing  one  large  mortgage  note  into  a 
number  of  smaller  notes,  all  secured  by  one 
mortgage — really  a  small  bond  issue.  But 
many  experienced  mortgage  investors  ob- 
ject strongly  to  this. 

The  personal  equation  is  a  strong  ele- 
ment in  the  sale  of  all  investments.  Per- 
haps 90  per  cent  of  every  sale  is  dealer's 
recommendation  and  10  per  cent  buyer's 
judgment. 

The  mortgage  broker  says:  "I  am  an 
expert.  I  have  investigated  this  property 
thoroughly  and  after  doing  so  loaned  my 
own  money  on  it.  I  recommend  it  to  you." 

And  the  investor  says:  "All  right, 
That's  enough  for  me.  I'll  take  it." 

And  yet  the  broker  becomes  in  no  way 
responsible  for  the  mortgage  he  has  sold. 
Should  the  mortgagor  default  in  payment, 
the  investor  would  have  no  recourse  on 
the  broker  on  whose  recommendation  he 
made  the  investment.  As  a  matter  of  fact. 


113 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

the  broker's  interests  in  the  matter  may  be 
directly  opposed  to  those  of  the  investor. 
For  example,  if  the  broker  is  also  a  dealer 
in  real  estate,  he  may  make  many  loans 
simply  to  aid  in  the  sale  of  properties. 
These  loans  must  be  made  as  full  as  pos- 
sible. 

From  the  investor's  standpoint,  how- 
ever, loans  should  be  made  with  the  widest 
possible  margin  of  security  instead  of  the 
least,  and  where  the  broker  makes  his 
loans  as  a  real  estate  seller  instead  of  as 
an  investor,  his  recommendation  becomes 
tainted  with  a  self-interest  that  makes  it 
worthless. 

So  much  for  our  American  System.  It 
is  true  that  we  get  along  with  it  pretty 
well,  just  as  we  do  with  our  faulty  cur- 
rency and  banking  system,  but  the  objec- 
tions pointed  out  above  are  very  real  ones 
and,  as  we  shall  presently  see,  such  things 
as  an  inflexible,  harsh  and  unfair  loan 
plan,  an  investment  dealer  with  responsi- 
bilities but  illy-defined,  and  a  mortgage  in- 

114 


EUROPEAN  MORTGAGE  SYSTEM 

vestment  with  faults  such  as  ours,  are 
matters  of  ancient  history  abroad. 

A  certain  traveler,  famous  in  English 
fiction,  patronizingly  adopted  as  his 
slogan,  "One  does  these  things  better  in 
France."  It  is  true  in  this  case  not  only 
of  France,  but  of  practically  all  of  Conti- 
nental Europe. 

The  modern  European  Mortgage  Sys- 
tem dates  back  to  the  early  part  of  the 
reign  of  Frederick  the  Great.  The  old 
warrior's  vigorous  military  campaigns,  one 
of  which  was  the  Seven  Years'  War,  had 
greatly  depleted  his  country's  resources. 
Crops  had  been  destroyed,  cattle  driven 
away  and  barns  and  farm  buildings  left  to 
the  ravages  of  time  and  tempest. 

Under  these  conditions,  when  peace 
finally  came,  investors  refused  to  put  their 
money  into  farm  mortgages,  thus  leaving 
the  farmers  without  funds  for  making 
their  crops  and  rebuilding  their  homes. 
Ruin  stared  the  country  in  the  face. 

Into   this   crisis   stepped   Buering,   the 


115 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

Berlin  merchant.  From  the  vantage  point 
of  the  outsider,  he  had  seen  the  trouble 
coming  and  out  of  his  clear  business  brain 
had  formulated  an  ideal  plan — the  fairest 
and  soundest  in  finance.  His  Mortgage 
System  with  but  few  changes  was  destined 
to  become  a  component  part  of  the  mone- 
tary system  of  every  great  country  in  Con- 
tinental Europe. 

Much  credit  also  is  due  the  great  king, 
who,  when  the  plan  was  laid  before  him, 
personally  contributed  the  first  funds 
necessary. 

The  success  of  Buering's  idea  was  im- 
mediate. It  soon  spread  throughout  all 
Germany  and  shortly  the  first  mortgage 
banks  were  organized. 

The  system  works  something  like  this. 
As  is  the  case  here,  there  are  three  parties 
to  every  real  estate  loan  transaction — the 
borrower,  the  mortgage  bank  and  the 
lender.  If  you  want  a  loan  on  real  estate 
in  Germany  today,  you  go  to  a  mortgage 
bank  and  give  your  mortgage  and  notes 

116 


LONG-TIME  LOANS  MADE 

exactly  as  you  do  in  this  country.  The 
mortgage  bank,  however,  though  the  mid- 
dleman, does  not  sell  your  mortgage 
directly  to  the  investor.  And  this  is  the 
crux  of  the  whole  system.  Instead  of 
turning  over  your  mortgage  in  the  form 
made  by  you  to  the  investor,  the  mortgage 
bank  holds  the  mortgage  among  its  assets 
and  issues  its  mortgage  bonds  to  the 
amount  of  the  loan  made  you,  which  bonds 
are  then  sold  to  investors. 

To  get  the  whole  idea  clearly  in  mind, 
let  us  see  how  it  applies  to  each  of  the 
three  parties  concerned. 

In  view  of  the  fact  that  the  loans  as 
made  are  not  sold  directly  to  investors,  the 
form  may  be  varied  to  suit  each  individual 
borrower's  needs.  Accordingly,  practi- 
cally all  loans  are  made  for  terms  of  from 
ten  to  fifty  years  and  on  what  is  called  the 
amortization  or  installment  plan.  Under 
this  plan,  provision  is  made  for  periodical 
payments  on  the  principal  of  the  debt  as 
well  as  the  interest.  The  borrower  may 

117 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

pay  off  his  loan  at  any  time  or  make  pay- 
ments ahead  as  he  gets  extra  money. 
Thus  the  loan  becomes  his  savings 
account. 

It  is  made  for  a  term  long  enough  to 
make  possible  its  repayment  out  of  the  in- 
come from  the  property  mortgaged.  Its 
very  form  helps  the  borrower  pay  it  back. 
Every  year  he  finds  himself  just  so  much 
ahead  of  the  game  and  when  the  term  of 
his  loan  ends,  he  has  his  property  free  and 
clear  of  debt.  Needless  to  say,  foreclos- 
ures are  infrequent  under  this  system. 

The  mortgage  bank,  instead  of  selling 
the  mortgages  it  takes  directly  to  investors, 
holds  them  among  its  assets  and  issues  its 
mortgage  bonds  against  them.  These  are 
direct  obligations  of  the  bank,  secured  by 
all  its  assets.  They  bear  a  rate  of  interest 
from  a  quarter  of  one  per  cent  to  one  per 
cent  lower  than  the  mortgages  securing 
them,  and  this  difference  represents  the 
mortgage  bank's  profit. 

This  means  that  the  investor,  instead  of 

118 


MARGIN   OF  SECURITY   INCREASES 

a  straight  mortgage,  gets  a  bond  secured 
by  at  least  an  equal  amount  of  first  mort- 
gages, and,  in  addition,  by  all  the  other 
assets  of  the  mortgage  bank.  In  other 
words,  he  gets  the  same  first  mortgage 
security  that  he  had  under  the  old  system, 
together  with  the  absolute  guarantee  of 
the  mortgage  bank  issuing  the  bonds. 

Moreover,  the  mortgage  security  is  of 
a  better  class  than  under  the  old  way. 
This  is  true  because  the  amortization  plan 
of  making  loans  gives  the  borrowers  every 
chance  and  greatly  decreases  foreclosures. 
Also  the  periodical  principal  payments  re- 
quired under  this  plan  steadily  increase  the 
margin  of  security  behind  the  bank's 
mortgages — making  them  better  and  bet- 
ter with  each  payment.  Then,  too,  the 
Mortgage  Bond  held  by  the  investor  is  se- 
cured, not  by  a  single  mortgage,  but  by  all 
the  mortgages  held  in  the  bank's  assets. 
These  mortgages  mutually  insure  one  an- 
other. Should  any  one  mortgage  fail  no 
investor  would  be  injured,  for  the  other 

119 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

mortgages  and  the  bank's  other  assets  in- 
sure against  this. 

Besides  these  advantages  in  point  of 
security  the  investor  gets  an  investment 
convenient  as  to  denominations  and  form 
and  one  that  may  be  listed  on  the  Stock 
Exchanges  and  sold  in  the  public  market, 
thus  assuring  convertibility. 

So  beautifully  has  the  mortgage  system 
formulated  by  the  German  merchant 
worked  out  that  today  it  is  in  use  in  prac- 
tically all  the  countries  of  Continental 
Europe.  Interest  rates  in  those  countries 
have  been  reduced,  violent  fluctuations  in 
rates  are  a  thing  of  the  past,  and  the  in- 
troduction of  much  foreign  capital  for 
lending  on  real  estate  has  been  made  pos- 
sible. 

Today  over  six  billion  dollars'  worth  of 
Mortgage  Bonds  are  listed  on  the  various 
European  Stock  Exchanges  and  so  highly 
are  they  esteemed  by  investors  that  they 
are  sold  at  prices  to  yield  from  4l/2  per 
cent  down  to  as  low  as  3  per  cent,  and  it 

120 


MORTGAGE  BONDS  FLUCTUATE  LESS 

has  been  noted  that  over  a  large  period  of 
years  Mortgage  Bonds  have  fluctuated  less 
than  any  other  class  of  listed  securities, 
government  bonds  not  excepted. 

In  this  country  the  German  Mortgage 
System  is  by  no  means  unknown. 

For  years  certain  trust  companies  in 
New  York,  Chicago,  St.  Louis,  Philadel- 
phia and  other  of  our  large  cities  have 
been  successfully  working  under  this  plan 
until  today  millions  of  dollars  of  domestic 
Mortgage  Bonds  are  held  by  investors. 

We  have  made  one  great  improvement 
over  the  European  system.  Here  a  com- 
pany issuing  Mortgage  Bonds,  instead  of 
holding  the  mortgages  it  makes  in  its  own 
assets,  places  them  in  the  hands  of  a 
trustee,  generally  another  trust  company, 
to  be  held  in  trust  for  the  security  of  the 
bondholders.  Thus  the  investor  obtains  a 
specific  security  in  mortgages  equal  in 
amount  to  the  bond  issue,  and  in  addition 
is  protected  by  all  the  other  assets  of  the 
company  as  well.  In  the  trust  agreement 
121 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

securing  the  bonds,  provisions  are  made 
specifying  exactly  what  kind  of  mortgages 
will  be  accepted  as  security,  what  character 
of  property  must  secure  them  and  what 
percentage  of  the  actual  value  of  the  prop- 
erty may  be  loaned. 

In  most  of  our  States,  compliance  with 
such  terms  is  made  certain  by  periodical 
examination  under  the  direction  of  State 
Banking  Commissions,  and,  in  addition,  in 
New  York,  Chicago  and  St.  Louis,  the 
affairs  of  banks  and  trust  companies  are 
regularly  audited  and  examined  by  the 
expert  accountants  connected  with  the 
local  Clearing  House  Association. 

These  additional  provisions  safeguard- 
ing investors  make  Mortgage  Bonds, 
where  they  can  be  obtained,  the  ideal  of 
conservative,  non-speculative  investments. 
They  are  superior  to  straight  first  mort- 
gages in  point  of  security,  convertibility 
and  convenience.  The  security,  generally 
improved  city  home  property,  is  funda- 
mentally stable  and  non-fluctuating  in 
122 


YIELD  A  HIGHER  RATE 

character.  It  is  not  affected  by  legisla- 
tion, strikes  or  panics.  In  addition.  Mort- 
gage Bonds  in  this  country  yield  a  higher 
rate  of  income  than  is  obtainable  from  any 
other  investment  of  the  same  security. 


123 


CHAPTER  X. 

The  St.  Louis  Mortgage  Bond  Company 
— Methods  of  the  Title  Guaranty  Trust 
Company — How  Its  Loans  Are  Made. 

IN  St.  Louis,  for  example,  the  Mort- 
gage   Bond    company    is    the    Title 
Guaranty  Trust  Company. 
This  Company  was  organized  in  1901 
under  the  trust  company  laws  of  the  State 
of  Missouri  and  is  subject  to  the  super- 
vision and  examination  of  the  State  Bank 
Commissioner.      It    conducts    a    general 
trust  company  business  in  all  its  branches, 
with  the  exception  of  the  acceptance  of 
time  and  demand  deposits. 

This  business  includes  the  examination 
and  guaranteeing  of  titles  to  real  estate, 
the  rental  of  safe  deposit  boxes,  the  acting 
as  trustee  under  bond  issues,  registrar  and 
transfer  agent  for  corporations  and  the 

125 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

making  of  real  estate  loans  and  issuing 
Mortgage  Bonds  secured  thereby. 

The  Company  owns  and  occupies  the. 
twelve-story  Title  Guaranty  Building  at 
Seventh  and  Chestnut  streets. 

Its  officers  and  principal  employes  are 
men  who  have  spent  the  better  part  of 
their  lives  in  the  business,  and  twenty-five 
successful  St.  Louis  business  men  compose 
its  Board  of  Directors. 

The  Title  Guaranty  Trust  Company  has 
a  full-paid  capital  of  $2,500,000  and  total 
resources  of  over  $3,500,000.  It  is  not 
engaged  in  the  banking  business  and  has 
no  demand  deposits  or  other  liabilities  sub- 
ject to  call,  thus  obviating  the  possibility 
of  unexpected  drains  upon  its  resources  to 
which  other  financial  institutions  may  be 
subjected. 

The  Mortgage  Bonds  of  this  Company 
are  secured  by  the  deposit  of  first  mort- 
gages on  improved  city  real  estate,  with 
the  American  Trust  Company,  trustee. 
For  this  purpose  it  is  provided  that  the 

126 


NOT  A  SINGLE  FORECLOSURE 

Trustee  shall  accept  first  mortgages  on 
improved  city  real  estate  and  nothing  else. 

Loans  on  farms,  vacant  property, 
churches,  clubs,  theatres,  second  mort- 
gages, leaseholds  and  undivided  interests 
are  excluded. 

The  loans  made  by  this  Company  and 
used  as  security  for  its  Mortgage  Bonds 
average  less  than  fifty-five  per  cent  of  the 
appraised  value  of  the  property  on  which 
they  are  based.  They  are  made  on  a  serial 
plan  requiring  reduction  by  periodical  pay- 
ments, which  insures  against  loss  through 
depreciation  and  greatly  increases  the 
margin  of  security. 

The  high  character  of  these  first  mort- 
gages and  the  conservative  methods  of  the 
Company  are  demonstrated  by  the  fact 
that  during  a  period  of  twelve  years,  in 
which  nearly  three  thousand  loans  aggre- 
gating approximately  six  million  dollars 
have  been  made,  not  a  single  foreclosure 
on  account  of  default  in  payment  has  been 
necessary. 

127 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

The  Title  Guaranty  Trust  Company  is 
ideally  constituted  to  conduct  a  Mortgage 
Bond  business  in  the  most  conservative  and 
scientific  manner. 

The  Company's  only  obligations  are  its 
Mortgage  Bonds.  These  are  issued  for 
any  length  of  time  the  investor  desires, 
and  the  maturities  are  thus  diffused  over 
a  long  period.  Hence,  only  a  small  pro- 
portion of  the  whole  amount  of  bonds  can 
'fall  due  in  any  one  month,  or,  indeed,  in 
any  one  year. 

The  Company  guarantees  its  bonds  and 
binds  itself  to  buy  them  back  at  par  and 
interest  on  any  interest  date  on  receipt  of 
thirty  days'  notice.  Interest  dates  are  dis- 
tributed through  the  twelve  months  of  the 
year,  so  that  only  a  fraction  of  this  liability 
can  possibly  accrue  at  any  one  time. 

Let  us  compare  this  with  the  liability  of 
a  bank  receiving  demand  deposits,  savings 
deposits  payable  on  thirty  days'  notice,  and 
time  deposits  payable  at  stated  periods, 
and  the  solidity  of  the  Title  Guaranty 

128 


DEMAND  DEPOSITS  PAID  FIRST 

Trust  Company's  position  will  be  em- 
phatically demonstrated. 

Such  a  bank  may  be  called  on  for  all  or 
any  part  of  its  demand  deposits  at  any 
time  and  will  have  to  meet  the  demand  or 
close  its  doors.  With  a  reserve  of  fifteen 
per  cent  or  more,  this  is  perfectly  safe 
business  both  for  the  bank  and  for  the  de- 
positor. Danger  arises  only  in  times  of 
financial  disturbance  or  panic,  when  con- 
fidence may  become  impaired  and  all  the 
depositors  attempt  to  withdraw  at  the 
same  time.  In  such  a  case  both  depositors 
and  bank  must  suffer. 

The  provision  for  thirty  days'  notice  be- 
fore the  withdrawal  of  savings  deposits  is 
a  protection  to  the  bank,  but  actually  in- 
creases the  risk  of  the  savings  depositor. 
For  in  a  time  of  stress  the  bank  will  have 
to  pay  its  demand  deposits  first  and  the 
savings  depositor  must  take  what  is  left. 

This  is  also  true  of  the  time  depositors 
or  those  holding  time  certificates  of  de- 
posit 

129 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

The  savings  and  time  deposits  of  a  bank 
are  secured  by  exactly  the  same  assets  as 
the  demand  deposits,  but  the  demand  de- 
positor holds  the  position  of  a  preferred 
creditor  because  he  can  enforce  payment 
of  his  account  ahead  of  the  others. 

These  elements  of  danger  both  to  the 
bank  and  the  depositor — and  it  must  be  un- 
derstood that  wherever  there  is  danger  for 
the  one  there  is  danger  for  the  other — are 
totally  absent  in  the  case  of  the  Title 
Guaranty  Trust  Company  and  its  Mort- 
gage Bondholders. 

The  Company  accepts  no  demand  depos- 
its which  might  be  subject  to  a  "run"  in 
times  of  panic. 

Its  only  obligations  are  its  Mortgage 
Bonds,  and,  as  explained  above,  only  a 
small  fraction  of  these  could  possibly  fall 
due  at  any  one  time. 

And  it  has  no  other  obligations  which 
could  in  any  way  be  preferred  to  its  Mort- 
gage Bonds. 

Moreover,  these  bonds  have  behind  them 

130 


THESE  BONDS  DOUBLY  SECURED 

not  only  the  general  assets  of  the  Com- 
pany, but,  in  addition,  are  secured  by  spe- 
cific mortgages  which  are  separated  from 
the  other  assets  of  the  Company  and  de- 
posited with  another  trust  company,  the 
trustee,  for  this  particular  purpose  and  no 
other. 

These  specific  mortgages  afford  an  im- 
portant additional  element  of  strength  in 
the  situation  in  that  they  supply  a  constant 
inflow  of  cash  which  may  be  utilized  at 
any  time  to  pay  off  bonds  as  the  demand 
arises. 

This  supply  of  cash  is  independent  of 
the  Company's  other  resources  and  is  of 
itself  more  than  sufficient  to  meet  any  de- 
mands which  the  bondholders  are  likely  to 
make  on  the  Company. 

It  consists  of  payments  made  on  the 
mortgages  in  the  hands  of  the  trustee. 
These  payments  average  each  year  an 
amount  greater  than  twenty-five  per  cent 
of  the  total  bonds  outstanding.  Ordina- 
rily this  money  is  reloaned  as  fast  as  it 

131 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

comes  in.  But  in  case  of  need  the  Com- 
pany has  only  to  stop  making  loans  and 
the  cash  will  pile  up. 

Furthermore,  the  Title  Guaranty  Trust 
Company  does  not  engage  in  the  buying 
and  selling  of  real  estate.  A  company  that 
does  engage  in  this  business  is  not  the  best 
investment  agent.  For  in  buying  and  sell- 
ing real  estate  it  is  often  necessary  to 
"boost"  values  to  an  unwarranted  extent 
and  to  make  full  loans  in  order  to  put  over 
sales. 

This  Company  does  not  deal  in  real  es- 
tate as  an  agent  nor  does  it  speculate  in 
real  estate  on  its  own  account.  It  has  no 
interests  adverse  to  its  investment  busi- 
ness, the  business  of  lending  money  safely. 

It  specializes  in  loaning  money  upon 
real  estate,  and  the  business  is  so  organized 
that  the  security  behind  every  dollar 
loaned  is  appraised  and  investigated  under 
the  most  thorough  and  scientific  methods. 

Each  applicant  for  a  loan  is  required  to 
make  an  accurate  statement  of  all  condi- 

132 


THOROUGHNESS  OF  INVESTIGATION 

tions  within  his  knowledge  affecting  the 
value  of  the  property.  He  must  give  ref- 
erences and  other  proofs  of  financial 
responsibility. 

The  property  is  then  examined  and  ap- 
praised by  an  expert  who  has  made  this 
his  lifework — one  whose  knowledge  of 
building  methods,  costs  and  property 
values  particularly  fits  him  to  judge  accur- 
ately the  worth  of  both  real  estate  and  the 
improvements  thereon.  The  appraiser 
makes  a  detailed  written  report  containing 
photographs,  plans,  statistics  and  other 
facts  summed  up  in  actual  figures  as  to  his 
judgment  on  the  property. 

His  report  is  then  submitted  to  the 
Company's  Executive  Committee,  which  is 
composed  of  the  president,  four  vice-presi- 
dents and  seven  directors,  five  of  whom  are 
real  estate  experts.  This  committee  exam- 
ines every  loan  application,  revalues  the 
property  and  renders  its  decision  thereon. 
Of  the  applications  that  reach  the  commit- 
tee many  are  rejected. 

Only  the  choicest  loans  are  made. 

133 


CHAPTER  XL 

The  Guarantee  in  Merchandising — Why 
Investments  Should  Be  Guaranteed — A 
Guaranteed  Mortgage  Bond — The  Most 
Convenient  Form — The  Ideal  Invest- 
ment. 


i 


last  forty  or  fifty  years  have 
witnessed  a  revolution  in  the 
principles  and  practices  of  mer- 
chandising. Under  the  lead  of  such  men 
as  Marshall  Field,  A.  T.  Stewart  and  John 
Wanamaker  business  has  discovered  that 
the  Golden  Rule  is  golden.  That  it  pays. 
It  was  once  thought  that  a  bargain  had 
but  one  side,  and  that  the  shrewd  busi- 
ness man  always  got  the  best  of  his  cus- 
tomer. Caveat  emptor,  let  the  buyer  be- 
ware, was  the  legal  expression  of  this 
attitude. 

Now  we  know  that  there  should  be  two 

135 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

profitable  sides  to  every  bargain.  And 
that  the  best  bargain  is  the  one  that  profits 
both  parties  the  most. 

The  modern  merchant  says  to  his  cus- 
tomer: "These  goods  are  guaranteed  to 
be  exactly  as  represented.  Your  money 
back  if  not  satisfied." 

Gloves,  socks,  automobiles,  pickles  and 
pants  are  sold  this  way. 

Investments,  however,  are  generally 
not  guaranteed.  The  investor  who  buys  a 
mortgage  from  a  real  estate  agent  or  a 
bond  from  a  broker  does  so  on  trust — on 
his  own  risk.  Neither  the  agent  nor  the 
broker  guarantees  his  goods. 

And  this  puts  the  investor  at  a  peculiar 
disadvantage.  In  buying  a  pair  of  gloves 
he  can  test  the  goods  for  fit  and  the  most 
cursory  examination  will  disclose  any  de- 
fect in  the  manufacture  before  he  buys. 

But  all  mortgages  and  bonds  look  and 
feel  alike.  The  ordinary  investor's  judg- 
ment on  real  estate  values  is  not  worth 
much  and  he  knows  it.  And  as  for  judg- 

136 


DIFFICULT  TO  JUDGE  INVESTMENTS 

ing  the  security  behind  a  railroad  bond 
only  the  expert  can  pretend  to  do  that — 
and  it  is  mostly  pretense  with  him. 

The  investor  can  never  know  whether 
he  has  made  a  bad  investment  or  not  until 
he  fails  to  receive  his  principal  or  interest. 
And  then  it  is  too  late  to  apply  a  remedy. 

So  ordinarily  investments  must  be 
bought  on  trust  without  a  guaranty.  The 
investment  dealer  says  to  his  customer: 
"Here  is  a  bond  into  which  I  have  just  put 
my  own  money.  I  have  investigated  the 
security  to  the  best  of  my  ability.  I  be- 
lieve it  is  good  and  I  recommend  it  to  you 
as  a  safe  investment." 

This  is  the  best  the  investor  can  get  and 
he  has  got  to  make  the  most  of  it.  But 
without  reflecting  on  his  honesty,  the  in- 
vestor cannot  help  but  feel  that  the  dealer 
has  a  pecuniary  interest  in  the  sale,  which 
makes  his  recommendation  more  or  less 
biased  and  that  although  he  has  put  his 
own  money  into  the  investment  he  is  get- 
ting it  out  again  as  fast  as  possible. 

137 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

He  cannot  help  but  suspect  that  the 
broker  will  make  more  out  of  selling  him 
a  risky  investment  than  a  certainly  safe 
one. 

Now,  these  are  some  of  the  reasons  why 
investments  should  be  guaranteed.  We 
realize  that  many  investment  houses 
proudly  boast  that  no  client  of  theirs  has 
ever  lost  a  cent  on  investments  made 
through  them.  And  we  do  not  doubt  that 
in  many  cases  such  statements  are  founded 
on  fact.  For  it  is  plain  that  the  successful 
investment  house  will  be  the  one  which 
offers  its  clients  the  least  number  of  bad 
investments. 

It  is  obvious,  however,  that  on  the  whole 
the  investor  is  not  sufficiently  protected. 
The  technical  nature  of  investments  is 
such  that  he  must  buy  them  almost  wholly 
on  trust,  and  where  he  misplaces  his  trust 
or  where  those  in  whom  he  trusts  make 
errors  in  judgment  he  is  forced  to  suffer 
through  no  fault  of  his  own. 

This  risk  is  entirely  eliminated  in  the 

138 


THESE  BONDS  GUARANTEED 

case  of  Mortgage  Bonds.  For  these  bonds 
are  guaranteed  and  can  be  cashed  at  the 
option  of  the  holder  at  par  and  interest 
without  discount  or  expense. 

The  Mortgage  Bond  issued  by  the  Title 
Guaranty  Trust  Company  of  St.  Louis  is 
secured  by  a  deposit  of  first  mortgages  on 
improved  city  real  estate  with  the  Amer- 
ican Trust  Company  as  trustee.  And  in 
addition  this  bond  is  the  direct  obligation 
of  and  guaranteed  by  the  Title  Guaranty 
Trust  Company. 

And  the  Company  absolutely  binds  itself 
to  cash  the  bond  at  the  option  of  the  holder 
at  par  and  accrued  interest  without  dis- 
count or  expense  on  any  interest  date  on 
receiving  thirty  days'  prior  notice.  This 
is  provided  in  the  bond  itself. 

Thus  this  bond  must  always  be  worth 
100  cents  on  the  dollar.  It  cannot  fluctu- 
ate in  value,  and  its  security  cannot  be 
impaired  by  legislation,  politics,  strikes, 
panics  or  market  manipulation. 

The  Title  Guaranty  Mortgage  Bond  is 

139 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

issued  as  a  registered  bond.  That  is,  in- 
stead of  being  made  payable  to  bearer, 
having  interest  coupons  attached  and  com- 
ing in  fixed  denominations  and  for  a  fixed 
period,  it  is  made  payable  to  the  purchaser 
alone  and  is  registered  in  his  name.  In- 
terest is  paid  by  check  mailed  to  the  owner 
every  six  months.  And  this  bond  may  be 
issued  in  any  amount  from  $50  up  and  for 
any  length  of  time  from  one  year  up. 

The  registered  bond  thus  has  a  number 
of  obvious  advantages. 

It  may  be  transferred  from  one  owner 
to  another  only  by  presentation  at  the 
office  of  the  Company.  Hence,  no  one  but 
the  real  owner  can  obtain  either  the  in- 
terest or  the  principal,  and  the  risk  of  loss 
or  theft  is  eliminated. 

The  payment  of  interest  by  check  in- 
stead of  coupons  has  been  found  to  be  a 
great  convenience  for  the  investor.  He 
may  select  any  interest  dates  he  desires, 
and  as  the  checks  are  mailed  to  him  auto- 
matically he  is  saved  the  bother  of  clipping 

140 


EXCEPTIONAL  ADVANTAGES 

coupons  and  keeping  track  of  the  periods 
when  they  fall  due. 

Perhaps  the  greatest  advantage  in  con- 
nection with  this  bond  lies  in  the  fact  that 
it  may  be  had  for  any  amount  and  for  any 
length  of  time.  It  is  no  longer  necessary 
for  the  investor  to  make  his  investments 
in  units  of  $1,000  and  be  forced  to  allow 
anything  under  that  amount  to  lie  idle. 
He  may  now  invest  any  sum  from  $50  up. 
Even  odd  amounts  like  $330  or  $1,750. 

And  he  may  arrange  his  investment  so 
that  it  will  come  due  at  any  time  he  desires. 

Thus  he  is  enabled  to  keep  all  of  his 
money  invested  all  of  the  time. 

Title  Guaranty  Mortgage  Bonds  are 
also  issued  in  the  form  of  coupon  bonds  in 
denominations  of  $100,  $500  and  $1,000. 

And,  lastly,  the  income  from  this  bond 
is  the  highest  consistent  with  perfect 
safety.  The  Title  Guaranty  Mortgage 
Bond  yields  5  per  cent  net. 

Abroad  mortgage  bonds  yield  from  3 
per  cent  to  4^/2  per  cent.  And  in  this 

141 


WHAT  EVERY  INVESTOR  SHOULD  KNOW 

country  the  best  railroad  and  public  utility 
bonds  yield  from  4  per  cent  to  5  per  cent. 
But  this  bond,  guaranteed,  cashable  at  par 
and  superior  in  point  of  security  and  con- 
venience, yields  full  5  per  cent  net. 

Is  this  not  then  the  ideal  investment? 
At  a  period  when  most  other  forms  of  in- 
vestment are  being  affected  adversely  by 
such  well-founded  and  far-reaching  eco- 
nomic tendencies  as  government  regula- 
tion, socialistic  legislation  and  the  single 
tax,  here  is  one  which  not  only  is  not 
affected  by  any  of  these,  but  is  actually 
strengthened  by  another  tendency  equally 
strong — that  of  increasing  real  estate 
values  due  to  the  rapid  growth  of  city 
population. 

And  this  investment  is  absolutely  guar- 
anteed, yields  5  per  cent  net  and  is  cash- 
able at  par  at  the  option  of  the  holder. 


142 


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